Ailing Infrastructure: Scrimping Threatens Germany's Future

Photo Gallery: Weak Infrastructure Spending in Germany Photos
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From the outside, Germany appears to have a robust economy. But a new study by a leading economic institute reveals that the country is investing far too little in infrastructure and its future, effectively saving itself to death. By SPIEGEL Staff

When the main contenders in the current general election campaign talk about Germany, if often sounds as if they all belong to the same party. Chancellor Angela Merkel, of the conservative Christian Democratic Union (CDU), has praised the country as a "successful export nation."

Her opponent, Peer Steinbrück, of the center-left Social Democrats (SPD), has lauded the "strong country" whose merits range from the traditional "social partnership" between German employers and employees to the "excellent university research landscape."

Of course there are also a few differences between the candidates, primarily when it comes to social justice. Steinbrück wants to raise taxes for the wealthy, while Merkel would like to increase pensions for retired mothers. But anyone who compares the speeches of the two top candidates is reminded of an upbeat campaign slogan from the 1980s: "Way to go, Germany!"

The chancellor and her main challenger are painting a reassuring but misleading image of the country, however. For quite some time now, Germans have suspected there is little reason for complacency. Anyone who travels through the country will notice roads full of potholes, disused railway tracks and dilapidated schools. And anyone who works for one of the country's large industrial companies also knows that most new production plants are built abroad, not in Germany.

Now, economists have translated Germany's deficiencies into hard numbers. The German Institute of Economic Research (DIW) is presenting a study this week that proves Germany is not Europe's economic hegemon, as British weekly The Economist recently suggested on its cover. Instead, the DIW paints the picture of an ailing economy that has been seriously out of balance for years.

Germans save more money than most living in the industrialized world, but they invest very little in their future, making them much weaker economically than leading politicians realize. According to the study, Germany is saving itself to death.

Chronic Lack of Investment

The diagnosis is alarming. Although Germany has weathered the financial and economic crisis better than all other large industrialized nations and created over a million new jobs, this comes largely thanks to years of wage restraint by the country's trade unions.

To make matters worse, the productivity of these jobs -- a decisive aspect of long-term growth and prosperity -- has contributed just as little to the current upswing as consumer demand, which has been an important growth driver in other countries.

The Berlin institute points to a chronic lack of investments as the main cause for this low productivity. Both the state and the private sector spend too little money on infrastructure, education, plants and machinery.

"Despite all the successes of the past few years, Germany has not created an investment basis to ensure robust growth," the researchers conclude.

In other words, Germany is living off its reserves. Bridges are crumbling, factories and universities are deteriorating, and not enough is being spent to maintain phone networks. This has resulted in a massive impoverishment of the country, according to DIW calculations.

Nearly 15 years ago, the state's net assets still corresponded to 20 percent of gross domestic product (GDP). When adjusted for inflation, this amounts to nearly €500 billion ($650 billion). By 2011, this had dwindled to 0.5 percent of GDP, or a mere €13 billion, primarily due to systematic neglect.

All of Germany's political parties have pledged to spend more money on highways, transportation and education during the upcoming legislative period -- but they have often made such promises in the past. In the end, however, the already meager budgets for investment were slashed and the money was distributed to preferential groups of voters. It could be a similar story this time around.

Good at Saving, Bad at Investing

The investment gaps keep getting bigger, too. The investment rate, or the proportion of the domestic product used for investment, has been declining for years. In 1999, it was still at 20 percent, but today it's down to just 17 percent. Year after year, tens of billions of euros have been missing for the sorely needed maintenance of highways, railways and machinery.

Since 1999, this has grown to become a colossal renewal backlog amounting to a trillion euros, according to the researchers' calculations. There's a simple adage in economics: Today's investments are tomorrow's growth. Accordingly, yesterday's investment gap is today's loss in prosperity.

The DIW researchers have calculated the impact of this shortfall over the years. If the Germans had invested as much as the average euro-zone country over the past 15 years, annual per capita growth would have been one percentage point higher -- and the Germans would be much more affluent today.

That's not to say that the Germans are poor, though. The country's savers put aside more money than practically any other industrialized nation. This is actually a good sign because savings form the basis for investments in an economy -- at least in a normal situation.

But for some time, nothing has been normal in Germany in this respect. Not only have the Germans placed a large proportion of their nest egg abroad, but the money invested there has not produced "the expected returns," as the DIW report says. "Since 1999, German investors have lost some €400 billion through bad investments abroad."

German industrial giants have been the main victims of this botched investment strategy. Telecommunications giant Deutsche Telekom, for example, wiped out shareholders' assets to the tune of €40 billion when it acquired two US mobile phone operators. The same thing happened to Daimler when it purchased American carmaker Chrysler for far too much. Eventually, both investments had to be largely written off as a loss.

But private individuals and banks also lost vast amounts of money. They purchased US securities, acquired a stake in office buildings in Dublin or invested in Spanish resorts. A large proportion of these assets disappeared, evaporating in the chaos of the global financial and European Union debt crisis.

If the Germans had invested their money at home, not only would they have received higher yields, but their country's economy would have grown more rapidly, DIW researchers discovered. This also would have produced higher tax revenues for the government.

The economists draw a clear conclusion from their analysis: The government has to spend more money on day care centers and domestic railway lines while creating incentives for more private investments in areas such as the energy and telecommunications sectors.

An investment package worth €75 billion a year would not only help fuel domestic growth, but also "bolster the Spanish and Italian economies," says DIW head Marcel Fratzscher.

At first glance, that may sound like the end of strict German budgetary policies, as politicians in Southern Europe have been urging for some time now, but in reality the DIW program is nothing of the sort. The researchers don't propose taking on additional debts. Instead, the government's money would be directed to where it produces the maximum economic benefit -- for example, in the transportation network of the western German state of North Rhine-Westphalia, Germany's commercial and industrial heartland.

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1. That's not true
timostukenkemper 06/27/2013
I do not know where this information comes from, but the Autobahn in North Rhine Westfalia are not worse than in other countries. Compared to Great Britain e.g. our Autobahnen are much better than those motorways, or should I say "Baugebietsstraßen"? THis article does not represent the real situation, too much drama!!
2. investment gaps
regulisssima 06/27/2013
Privatize or go bust !
3. bad at investing...
forenfux 06/27/2013
...that's true - as we "invest" our money in southern europe. Or better, we sink our money there. I believe the germans are the only people in europe with whom politician can deal like this.
4. Thank you
fortyplus 06/27/2013
very much for writing up such a great article! It reflects what I see every day when I'm trying to drive somewhere without losing parts of my car (hint: it's not because of my car). I fear that there might be some work to do...and not just on the roads...
5. A Shining Example
peterboyle.4848 06/28/2013
If Germany wants an object lesson of what happens when you neglect social welfare and investment on infrastructure look to the US. It, too has lived on the fat created in the years before Reagan and Supply Side economics took hold. It has not invested in infrastructure and has severly curtailed all social welfare for 30 years. Behind the brightly painted face, it is rotten and disintigrating inside, with a Congress that is dysfunctional and unlikely to reach any meaningful course of corrective action in the foreseeable future. Germany did not export its manufacturing as did the US, nor did Germany stop investing in job training as the US did. Hopefully, Germany has learned that continual high growth has an awful price that is hidden during the good times. If that lesson has been learned it will opt for slower growth that raises ALL the people's boats equally, not just those at the top of the economic ladder. As always, it is up to the people to make their elected officials do what the people tell them to do. Time will tell if Germany has learned that lesson.
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