Photo Gallery: Weak Infrastructure Spending in Germany

Foto: Tim Brakemeier/ dpa

Ailing Infrastructure Scrimping Threatens Germany's Future

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.

Rotting Roadways

The building looks like the bridge of a spaceship. Staff members dim the overhead lamps and green, yellow and red lights are blinking everywhere. The large monitors under the ceiling don't provide an expansive view of outer space, though. They transmit live images of traffic on North Rhine-Westphalia's autobahns.

In late April, the Düsseldorf Ministry of Transportation opened this new control center in a bid to deal with its increasingly congested highways. Indeed, many of the county's bridges and autobahns still date back to the 1970s. They are rusting and crumbling everywhere, and can no longer handle the continuously rising volume of traffic. Recently, the bridge over the Rhine River near Leverkusen was closed to trucks for a number of weeks, backing up traffic for miles. This is not just a headache for North Rhine-Westphalia, but all of western Germany. Major freight traffic routes to Western Europe pass through the state.

According to studies commissioned by North Rhine-Westphalia Transport Minister Michael Groschek (SPD), the state's entire highway infrastructure is in desolate condition. Of the 100 bridges inspected so far, 80 are in desperate need of repairs and maintenance. An additional 700 inspections still need to be conducted, yet Groschek already estimates that some €4.2 billion must be invested. "And things don't look any different with many railway bridges, highways and canals," he says, adding that some rail bridges are more than 100 years old.

Regional newspapers are already referring to the area's "terminal gridlock," and some companies are wondering how long they will still be able to ship their manufactured goods to the global market. One of these companies has its headquarters in the Siegen-Wittgenstein region, just east of Cologne. SMS Siemag has a global workforce of 13,500 and produces huge high-tech rolling stands for new steel mills. These machine components weigh up to 400 metric tons, and it takes weeks of precision work to manufacture them at the plant in Hilchenbach, Germany. "Up until then, we have everything well under control," says CEO Burkhard Dahmen.

But then comes the transportation.

The components have to be trucked down to large ships in the port of Hamburg or the inland harbor at Duisburg -- and this has become an odyssey. Many bridges and highways in North Rhine-Westphalia are no longer rated to handle the immense loads. They could literally collapse under the weight.

When the logistics professionals map out a route, it takes ages for the shipments to arrive. "They're on the road sometimes for over a week before they reach the seaport of Hamburg," says Dahmen. The trip used to take just one day, but now there are sometimes no passable routes due to construction or closed highways. Then the company runs the risk of paying large contractual penalties because timely deliveries are a standard element of international business agreements.

Transport Minister Groschek has promised to help companies like SMS Siemag, but it remains to be seen how he intends to finance the necessary work on the highway network. After all, this is not the only region where the infrastructure is crumbling. Some 20 percent of the nation's autobahns and over 40 percent of federal roads need repair.

A Meager Transportation Budget

The condition of the railway network is not much better. Volker Kefer, the board member responsible for technology at Germany's national railway operator, Deutsche Bahn, calculates that if the company actually pressed ahead with all modernization and expansion projects that have been planned and budgeted, it couldn't launch any new projects until the year 2030.

Nevertheless, there is a massive investment backlog. Deutsche Bahn should actually be expanding important transportation hubs like Cologne and Hamburg, meeting international obligations like the Fehmarn Belt crossing between Germany and Denmark, and improving noise-reduction measures along freight routes. But there is little to no funding available for all of this. "We have to make up our minds in Germany," says Kefer. "Either the federal government invests more money, or we will soon reach our capacity limits."

There is a simple reason why the world's fourth largest economy  -- and the most important transit country in Europe -- maintains a poorer transportation network in some instances than many emerging nations. The transportation budget is chronically underfinanced. The DIW experts have meticulously calculated that between 2006 and 2011 alone, the federal government, states and municipalities annually invested nearly €4 billion too little in maintaining Germany's over 650,000 kilometer (400,000 miles) of highways and its railway network encompassing some 40,000 kilometers (25,000 miles) of tracks.

Since this tradition of bleeding the country dry extends back to the 1990s, there is an enormous need for investment, the researchers conclude. If Germany intends to adequately maintain its existing infrastructure, it will have to spend an additional €6.5 billion -- year after year.

Falling Behind with Internet Connections

Patience is not exactly one of Ute Gabriel-Boucsein's best qualities. "We were fed up with the endless waiting, the excuses and inaction of the big companies," she says. The resolute woman from the North Friesian town of Husum on the North Sea coast, not far from the Danish border, runs a fairly unique company with an equally unique name: BürgerBreitbandNetz ("CitizensBroadbandNetwork").

Founded over a year ago, the company has some 850 owners, all of them residents of Husum and surrounding communities. Collectively, they have invested some €2 million as shareholders in the company.

The North Friesians intend to use the money to build a hyper-speed Internet. Over the next seven years, some 20,000 households and companies in 59 communities will be linked via a network of state-of-the-art fiber-optic cables. The plan requires an investment of roughly €70 million.

The idea was hatched over two years ago out of sheer desperation. Without a fast Internet  connection, it was no longer possible to sell properties, building sites and commercial lots in the thinly populated region, according to Gabriel-Boucsein, who says that "the region was in danger of hemorrhaging." And since the state offered few direct options and companies like Deutsche Telekom have no interest in sinking too much money into an area with so few inhabitants, the North Friesians have developed their own modernization plan. Work has already begun on one segment, and when it is completed the first families will be provided with phone service, their own homepage and a turbo Internet connection with speeds of 50 megabits per second.

It's hard to believe, but when it comes to one of the most important technologies of the 21st-century, namely building a nationwide high-speed Internet network, Germany is in danger of lagging behind the rest of the international community.

Although German industry and leading technology gurus are calling for the establishment of a high-speed fiber-optic network, little progress has been made. In a study published late last year, Germany came in almost last -- far outranked by countries like Lithuania, Bulgaria and Romania.

Germany's decades-old copper cable network won't be able to keep up with the rapidly increasing amounts of data and transfer speeds that will come to dominate development in the coming years. Experts like Torsten Gerpott from the University of Duisburg-Essen say that without fiber-optic cables Germany will simply no longer be a major international player.

Chancellor Merkel  says that she wants to see 75 percent of all Germans have a high-speed broadband connection by the year 2014. But that's hardly feasible. Speeds of up to 10 megabits are the norm these days. The switchover to fiber-optic cables would cost over €80 billion -- and no one knows where the money is supposed to come from. The state can't raise this amount of money, and Deutsche Telekom is being held back by the Federal Network Agency, which oversees the sector. Telekom CEO René Obermann complains that for a long time the agency was only interested in reducing phone and Internet rates, a fashionable policy that brought in votes.

But Germany's strict price regulations made it impossible for companies to build up the necessary billions of euros in reserves to build new networks. There isn't enough funding -- just as there is a dearth of cash to implement one of the country's key industrial projects for the future, the Energiewende, Germany's plan to phase out nuclear energy and massively increase its reliance on renewable sources.

Communication Breakdown

Right until the end, Arno Rosenkranz was hoping for a positive signal from the company headquarters in Düsseldorf. The E.ON plant foreman and his team had perfectly prepared everything over the previous months.

All of the permits had been acquired, and there was no objection to the huge project right in the heart of the Kellerwald-Edersee National Park in the central German state of Hesse, where energy giant E.ON planned to significantly increase the size of the Waldeck pump-storage power plant, which had existed since 1932. Water from an enlarged lake above ground was to flow through huge tunnels inside the mountain and fall hundreds of meters to turn new cutting-edge turbines and produce power for the Energiewende.

The company planned to invest some €300 million in the project, which actually fits in perfectly with the federal government's intended reorganization of the German power system. With the help of hydroelectric power, fluctuations from solar and wind energy can be balanced out in an elegant and environmentally-friendly manner. But the company's headquarters failed to give the project the green light, citing unclear conditions in the energy sector that made the investment too risky.

The situation is grotesque. For the Energiewende to succeed, hundreds of billions of euros have to be invested in new networks, wind farms and power storage facilities. But banks, insurance companies, corporations and private investors are significantly scaling back their plans. Countless projects are being postponed, reduced or scrapped altogether in reaction to the indecisive and haphazard approach of politicians. Instead of doing everything possible to promote private investments in new power technologies and infrastructure, for months now the federal and state governments have not even been able to agree on a reform of the Renewable Energy Act (EEG) -- with dramatic consequences.

The entire power sector -- from wind farm operators to electrical giants like RWE -- is plagued by uncertainty. Will there be a cap on subsidies for renewable energy as announced by German Environment Minister Peter Altmaier? Will storage facilities like the one in Waldeck be granted special conditions because they stabilize the network? Will the power lines for the planned offshore wind farms in the North Sea and the Baltic Sea be ready on time? And who will pay for maintaining and operating the reserve power plants that are still required? As long as such issues remain unresolved, no serious investor will be willing to put their money on the line, say officials at Trianel, the municipal utility association in Aachen, which is Germany's largest such organization and represents over 100 companies. Consequently, Trianel has just put the brakes on a €700 million project in Krefeld, where two old coal-fired power plants were to be replaced by highly efficient environmentally-friendly gas turbines, located in a business park for chemical companies.

The permits, the money and the will to build are all there. "What is missing," say Trianel managers, "are reliable guidelines for how things should continue next year with the Energiewende."

In the run-up to the general election in September, no decisions are likely to be made. Merkel doesn't want to give the opposition any election campaign  ammunition on the Energiewende issue. For their part, the Social Democrats and the environmentally-friendly Green Party are using their influence in the state governments and in the upper legislative chamber that represents the states, the Bundesrat, to block important reforms. The bitter consequence is that hopelessly obsolete power plants and networks are not being replaced with modern technology, and it is becoming increasingly expensive to fill the gaps in power supplies.

According to the DIW's calculations, though, a rapid expansion would be extremely well-invested money, even with additional subsidies. The study points out that the savings alone from the reduced use of fossil fuels like oil, gas and coal would compensate over the medium term for the billions invested in green energy. Already by the year 2020, this could boost economic growth by some 2.8 percent.

Other experts recommend a slower transition to wind and solar energy to avoid significantly driving up prices. But even that would entail fundamentally restructuring Germany's power system. In addition to reliable framework conditions, this would require annual investments of up to €38 billion. When it comes to existing programs, DIW expert Claudia Kemfert says that it is primarily initiatives to make buildings more energy efficient that require more funding over the coming years. She points out that installing the right insulation or new heating systems can pave the way for immense reductions in energy consumption -- assuming, of course, that enough engineers are trained in Germany to be able to plan this transition.

Playing Catch-Up on Education

The Fröbel day care center in the Berlin district of Adlershof looks a bit like paradise -- and not just because the colorful building stands out from its inhospitable surroundings. Children can browse through reading corners jam-packed with books, conduct experiments in the research area or romp around in the big yard, which includes a playground.

The parents also get just about everything they want. The day care center is open year-round, usually from 6 a.m. to 8 p.m., and right next door there is a family counseling center that provides professional assistance for all issues related to raising children.

As good as all this might sound, the head of the Fröbel Group, Stefan Spieker, would like to offer even more -- improving the program to match the standard in other countries. "In order to keep pace internationally, we would have to significantly improve the ratio of caregivers to children," he says. "But we don't just need more caregivers -- we also need to give them better pay to make the profession more attractive."

But there's no money in government budgets for this. For years, German politicians have tirelessly repeated the mantra "we need to invest more in education" during their grand speeches -- and, at first glance, this political aspiration almost appears to have come true. Public spending on education rose by one-third from 1995 to 2009, bringing it to some €100 billion.

But the reality behind these figures is anything but a success story. Expenditures actually only rose somewhat faster than inflation. With a proportion of the government budget amounting to just 5.3 percent, Germany's spending on education is not only below the EU average, but also considerably lower than in most OECD countries. And the country's ambitious nursery care program, which costs billions of euros and aims to offer care to one out of every three toddlers, is making slow headway. Nearly 200,000 spots are still needed.

Still, experts have known for a long time that education is much more effective when it begins at an earlier stage in a child's life. German day care centers, however, only achieve "a mediocre level of quality" compared to international standards, as the DIW researchers note. To make matters worse, many children "whose parents have low-level education" are often not even enrolled in the first place. It would thus make sense to further improve childcare facilities for toddlers. Currently, a meager 0.1 percent of Germany's GDP goes toward educating children under the age of three. In Scandinavia, this figure is up to eightfold higher. If Germany were to use this as a guideline, federal, state and municipal governments would have to spend some €18 billion more on early childhood education than they do today.

Choosing the Future, Not the Past

"Politicians are making campaign promises," says DIW head Fratzscher. "But not enough is being said about how Germany can secure its economic future." His plan is an annual investment program amounting to €75 billion.

The funds for this are available, according to DIW researchers. In their opinion, public finances offer sufficient leeway to raise a large proportion of this money. "Over the medium term, government budgets will enjoy increasing surpluses," as it says in the study. For the year 2017 alone, the DIW anticipates a public-sector surplus of €28 billion.

On top of this, there are some €10 billion that the federal government is allowed to raise on the capital market despite the so-called debt brake, which requires Berlin to maintain a nearly balanced budget starting in 2016. Researchers see this as an ideal opportunity as interest rates are cheaper than almost ever before. "German financial policy should make use of this excellent fiscal situation and create a roadmap today for higher potential growth in the future," DIW researchers recommend.

In addition, private investments could be mobilized on a large scale if the next government creates the right conditions. Germany's savers are looking for high-yield investments. Since the beginning of the euro crisis  in particular, international financial investors have also come to appreciate Germany's legal framework and stability.

The only problem is that the DIW proposals don't match up with the political election campaign platforms. Anyone who wants to boost investments should not spend the money on higher pensions and more generous child-rearing benefits -- or increase taxes, as the SPD and Greens are suggesting. This could have a "significantly negative" influence, Fratzscher warns.

Nevertheless, there is a fairly good chance that the DIW proposals will be heard in Berlin, although probably not over the coming weeks. Right now, Germany is in the midst of an election campaign -- and election campaigns are a time for illusions, buying votes and making empty promises.

But this election campaign will end on Sept. 22, and then the politicians must govern the country. What's more, a coalition of parties, regardless of its political leanings, will have to decide on which agenda to pursue with the limited financial means available over the next legislative period -- between the future or the past, development or decay, clientelism or helping to resolve the euro crisis.

"It's about the right priorities," says DIW head Fratzscher. "It's about the question of whether Germany should focus on consumption and fiscal transfers or on investments." He urges a course that is "clearly in favor of investments."


Translated from the German by Paul Cohen
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