Germany's Ailing Infrastructure A Nation Slowly Crumbles
Germany has long had a reputation for excellent infrastructure. But in recent years, both public and private investment has dwindled dramatically, and officials are increasingly concerned about how to solve the problem. They have good reason to be worried.
Despite its shiny façade, the German economy is crumbling at its core. That, at least, is how Marcel Fratzscher sees it. With the country's infrastructure becoming obsolete and companies preferring to invest abroad, the government advisor argues that German prosperity is faltering.
When Fratzscher, the head of the German Institute for Economic Research, gives a talk these days, he likes to pose a question to his audience: "Which country is this?" He then describes a place that has seen less growth than the average among euro-zone countries since the turn of the millenium, where productivity has only increased slightly and where two out of three employees earn less today than they did in 2000.
Fratzscher usually doesn't have to wait long before people begin raising their hands. "Portugal," one person offers; "Italy," says another; "France," exclaims a third. The economist allows his audience to continue searching for the right answer, until, with a triumphant smile, he announces the answer. The country he is looking for, the one with the weak economic results, is Germany.
Perhaps it takes someone with Fratzscher's background to be so scathingly critical of own country. The Bonn economist worked as a government adviser in Jakarta in the mid-1990s during the Asian financial crisis. He conducted research at the renowned Peterson Institute in Washington when the dot-com bubble burst and wrote analyses for the European Central Bank in the darkest hours of the euro crisis. He has always observed developments in Germany "with a certain amount of distance," he says.
Fratzscher has headed the German Institute for Economic Research (DIW) for more than a year now, and it is clear that this newfound proximity has sharpened his view of the contradictions in the world's fourth-largest economy. German industry sells high-quality automobiles and machines around the world, but when the plaster begins to crumble in an elementary school, parents have to raise money to hire a painter. Companies and private households are sitting on trillions in assets, but half of all autobahn bridges are urgently in need of repair. Germany derives more benefits from Europe than most other countries, and yet its citizens feel taken advantage of by Brussels.
Fratzscher calls it "Die Deutschland Illusion" ("The Germany Illusion"), the title of his new book which German Economics Minister Sigmar Gabriel will introduce on Friday. Last year, he asked his staff at DIW, one of the most important think tanks in the country, to address the underpinnings of the German economy. Fratzscher has condensed the results into an unvarnished reckoning with the country's economic grand delusions.
Germans see their country as an engine of employment and model of reform for all of Europe, Fratzscher claims, and yet Germany has barely made up for its own economic slump triggered by the financial crisis. Fratzscher's Germany looks like a giant from a distance but gets smaller and smaller the closer you get. The country is "on a downward path," writes the DIW president, and it's living "from its reserves."
Strong labor market figures still conceal Germany's most dangerous weakness: Hardly any other industrialized nation is so negligent and tight-fisted about its future. While the government and the economy were investing 25 percent of total economic output in new roads, telephone lines, university buildings and factories in the early 1990s, the number declined to only 19.7 percent in 2013, according to recent figures from the Federal Statistical Office.
That is more than just a statistical triviality. The future of the country and the everyday lives of its citizens depend on how each euro is used today. If a euro is spent immediately, it has no use for the future. It can also be saved for future consumption. Or it can be invested in companies, education and infrastructure, so that it becomes the basis for future prosperity, technical progress and additional jobs.
The problem in Germany is that money is currently being used primarily for the first two purposes. According to DIW calculations, the investment shortfall between 1999 and 2012 amounted to about 3 percent of gross domestic product, the largest "investment gap" of any European country. If one looks only at the years from 2010 to 2012, the gap, at 3.7 percent, is even bigger. Just to maintain the status quo and achieve reasonable growth, the government and business world would have to spend 103 billion ($133 billion) more each year than they do today.
This is Fratzscher's key diagnosis -- and now the onus is on him to find the treatment. Since Economics Minister Gabriel appointed him as his investment commissioner at the end of last month, he has been at the center of a spending reform debate potentially as important as the one over the Agenda 2010 reforms to the labor market and social welfare system.
The current economic downturn makes the problem all the more urgent. Now that industry has seen a decline in order volume and scaled back production, the government must decide whether to offset the decline with an investment program.
What was recently nothing more than a theoretical possibility could soon become a central sticking point for Chancellor Angela Merkel's coalition government. While Merkel and Finance Wolfgang Schäuble remain determined to adhere to their plans to present a balanced federal budget next year, Fratzscher advocates preparing for a worst-case scenario. "If the crisis worsens once again," he said in a conversation with SPIEGEL, "more spending will be needed to bolster the economy."
If that happens, Fratzscher's book could offer a blueprint for how to proceed. In his study, the DIW president meticulously lists Germany's biggest investment problems from companies to the transportation network, and from education to the Energiewende, the federal government's shift away from nuclear power and toward green energy. Supporting evidence for his theories can be found all over the country.
A vanishing loyalty to Germany
Rainer Hundsdörfer is about to make what is perhaps the most difficult decision of his professional life. His company plans to invest 50 million soon, but he is unsure if it's still worth spending that money in his homeland.
Hundsdörfer is the chief executive of fan manufacturer Ebm-Pabst. The industrial fans the company produces in the southern German town of Mulfingen are installed in supermarket refrigeration systems, hotel air-conditioners and computer servers worldwide. Overseas markets already account for about 70 percent of the company's sales.
Ebm-Pabst has long been producing some of its products in India and China, but thus far its objective when investing in foreign countries was simply to be closer to new customers. The company remained fiercely loyal to its native Franconia region in Germany. But that loyalty could evaporate with the next investment decision. "It would be the first time we decide against the German site," says Hundsdörfer.
The company wants to expand a plant in Mulfingen and build a new logistics center. This could create hundreds of jobs, but what is missing is "a decent road infrastructure to make our investment worthwhile," says Hundsdörfer. His trucks are forced to use Hollenbacher Steige, a crumbling road urgently in need of repaving. Often, trucks coming from opposite directions can't pass each other on the narrow road.
The road construction project would cost 3.48 million, but state and local governments have been hesitant to move forward for years, citing costs. For Hundsdörfer, the numbers simply don't add up. "We pay more in commercial tax each year than the road would cost to build." Now Hundsdörfer is considering the previously unthinkable: Why not build the logistics center abroad? Hundsdörfer wouldn't be alone in making that choice.
Decreased Industrial Investment
The German economy has shied away from investment for years. Companies have almost 500 billion stashed in savings, according to the DIW president's estimates, and yet the investment ratio in the German private economy fell from just under 21 percent in 2000 to a little more than 17 percent in 2013.
Many economists conclude that companies are anxious because they are worried not just about crumbling roads, but about the lack of qualified workers, the state of the euro zone and rising energy costs. And this fear, in turn, is stymying the planning for Germany's future.
The consequences are dramatic. When adjusted for inflation, many businesses have actually decreased their spending on machinery and computers in the last decades, according to the figures from the Federal Statistical Office. This is especially true of the chemical industry, but industrial infrastructure is also crumbling in, for example, the mechanical engineering and electronics sectors.
But companies haven't stopped investing altogether -- they are simply no longer investing in Germany. Bavarian carmaker BMW is currently spending $1 billion on turning its Spartanburg, South Carolina plant into its largest worldwide. Daimler now assembles the new C class for the American market in the town of Tuscaloosa, Alabama. And painting equipment manufacturer Dürr expanded its factory building in Shanghai last year so that it matches the size of its headquarters in Bietigheim-Bissingen, near Stuttgart.
Since the fracking boom has lowered energy prices, the United States in particular has blossomed as a preferred site for German companies. In May, BASF CEO Kurt Bock announced a new 1 billion investment, the largest in company history, on the American Gulf Coast. In explaining the decision, the executive noted that natural gas in the United States costs only a third of what it does in Germany. Technology giant Siemens even went a step further, announcing that it will run its entire business from offices in the United States in the future.
- Part 1: A Nation Slowly Crumbles
- Part 2: Infrastructure -- A Herculean Task