Infrastructure funding in Germany

December 2013 | FEATURE | SECTOR ANALYSIS

Financier Worldwide Magazine

Arguably, Angela Merkel, and more importantly, Germany, were among the winners of the global financial crisis. The German economy withstood the hardships of the global downturn and the European debt crisis handily, better perhaps than any other industrialised nation. Germany has emerged as the largest economy in Europe and the fourth largest economic power in the world. Since 2009, Germany’s gross domestic product (GDP) has grown by more than 8 percent and over 1.2 million new jobs have been created. Public finances have been consolidated and in 2012 there was a fiscal surplus of 0.2 percent of GDP.

A further indication of Germany’s rise to economic prominence can be seen in the country’s recent general election. While many of the other pre-financial crisis governments of Europe in nations such as Britain, France and Spain were swept out, in September 2013 Germany’s Chancellor Merkel won by a landslide, securing a third term. She is recognised by many, unofficially, as the de facto leader of Europe. Germany’s position as the financial powerhouse of Europe is unequivocal.

Under the premiership of Chancellor Merkel, the country has continued in its role as one of the world’s most preeminent exporters and has enjoyed record low levels of unemployment. What makes this economic rebirth even more impressive is that it has come against the backdrop of wider European economic failure. Since the late 1990s Germany has done a fine job of rebuilding its standing within Europe. The late 1990s saw the country labelled the ‘sick man of Europe’ due to its ongoing economic problems, most notably because of the enormous costs associated with the reunification of East and West Germany. The reunification process is estimated to have cost over €1.5 trillion. While Germany has undergone a renaissance, a number of other European nations have collapsed almost into ruin. The economies of Spain, Italy, Greece and Cyprus stood on the precipice of total financial meltdown before the austerity measures of Chancellor Merkel stopped them from collapsing completely.

Where other countries see only economic hardship in their future, common sense dictates that Germany should go from strength to strength. An influx of skilled immigrants, low borrowing costs, a balanced budget and a growing housing market all point to a prosperous and optimistic future for Germany and German businesses.

Yet, despite the many positives, there is a hidden caveat to the nation’s economic prosperity. For around 20 years Germany has seriously neglected its investment obligations when it comes to infrastructure development. Despite the country’s position at the top of the European economic table, Germany spends just 1.5 percent of its GDP on infrastructure development, considerably less than the US and most other European nations. To put this spending into context, according to data released by the European Commission, depreciation of public infrastructure in Germany has been outstripping investment for over a decade. This is in direct contrast to a long term trend of positive net infrastructure investment in the US and across Europe. In 2012, German public infrastructure investment of €39.5bn was down 9.5 percent from 2011 in inflation adjusted terms. A further drop is expected in 2013’s figures.

This underinvestment could substantially hinder Germany’s growth potential and may hold back job creation. Already the lack of investment in transport infrastructure has led to a gradual deterioration of the country’s once-formidable network of roads, waterways, schools and other physical assets. Much of Germany’s transport network was constructed during the 1950s and 1960s, and is in desperate need of significant renovation work. This work will be crucial to helping Germany to maintain its position as Europe’s premier exporter. Germany is currently the world’s largest exporter behind the US and China, exporting many items from automobiles to heavy machinery for manufacturing and agriculture. In 2012 German exports totalled €1.1 trillion. Around 40 percent of German exports go to other nations within the eurozone. France, the second largest economy in Europe, took German goods worth around €129bn in 2012.

But in order to maintain its position as a large scale exporter of goods, the closure of vital transport links around industrial cities such as Leverkusen in North Rhine-Westphalia, cannot be repeated. On 30 November 2012 the State Ministry of Transportation closed a six lane bridge in Leverkusen to all vehicles with a gross weight of over 3.5 tonnes. The bridge, which is used by over 15,000 trucks a day, was only partially reopened in March 2013, and even at the time of writing there are still a number of weight restrictions in place which will remain for the foreseeable future. Similarly, difficulties have been faced on the popular A3 autobahn near Cologne, where authorities have had to reduce speed limits to 60km/h.

Anecdotal evidence aside, the state of the road system at both Leverkusen and Cologne is an allegory for Germany’s wider infrastructure woes. These bridges are vital to the economic strength of the nation as a whole, yet they are in desperate need of modernisation if they are to cope with the heavy traffic loads of the future.

Despite the calls for much needed investment in the country’s road network, the insertion of the Schuldenbremsen or debt brake into the German constitution in 2009 means that local municipalities do not have the necessary financial flexibility to undertake much needed modernisation works themselves.

In light of Germany’s standing as a leading exporter and the obvious funding deficiencies being experienced across the various German municipalities and Länder,calls for widespread and meaningful investment in transport infrastructure are growing from economists and business leaders alike. In order to help safeguard the economic prosperity of the nation, the German Institute for Economic Research (DIW) notes that “a quantitatively and qualitatively efficient transport infrastructure is a fundamental requirement”. DIW’s study, released in October, notes that despite the importance of the export industry to the economy, there is currently a serious lack of investment in maintenance and quality assurance for transport infrastructure.

In recent years Germany has seen an investment shortfall of around €4bn with regard to the maintenance of the country’s transport network. Considering the size of Germany’s physical transport networks, the nation’s transportation budget is massively underfunded. In order to plug this investment gap, the additional annual investment requirement to simply maintain the transport network is likely to be at least €6.5bn. This figure does not, however, take into account the cost of vital improvement and modernisation projects.

Transport Minister Michael Groschek has pledged to help improve the nation’s highways network, although the question of how he intends to finance the work remains unanswered. According to estimates, around 20 percent of the nation’s autobahn network requires extensive repair work and over 40 percent of federal roads are in a state of disrepair. Despite Mr Groschek’s assurances, Germany has seen these sorts of spending promises before. More often than not these schemes do not come to fruition. Money which is earmarked for improvements to highways, transportation networks and the country’s education system is diverted to preferential voter groups, investment budgets are slashed, and the status quo prevails.

The German rail network is also persistently underfunded. According to Deutsche Bahn, the country’s national railway operator, if the company pushed forward with the programs of modernisation and expansion that it currently has planned and budgeted it would be unable to launch any new projects until 2030.

Despite all of the positive work Chancellor Merkel has done during the European debt crisis, her long running campaign for austerity and balanced budgets has helped bring about Germany’s current infrastructure emergency. In 2012 the government announced a revision to its 2011-2015 transport spending plan, cutting planned outlays from €57bn to €41.5bn. According to the transport ministry this new figure is “more honest” than the original budget. Furthermore, although Chancellor Merkel pledged in her election campaign to increase infrastructure spending by €1bn in 2014, overall federal spending is projected to decline to €309bn in 2016, down from €312bn in 2012.

Germany’s education system is also in desperate need of investment. According to the country’s association of teachers, many of Germany’s schools and universities are in a serious state of disrepair. A large proportion of the country’s school buildings were constructed from around 1900 onwards and are crumbling. The dilapidated nature of Germany’s school system is not only a serious health hazard to pupils but, in the long run, it will also have a negative effect on future German productivity, and will threaten potential growth.

This chronic lack of investment is a massive concern. Although Germany saves more money than almost every other industrialised nation worldwide, is the country saving itself to death? Despite the outward impression of German economic strength, a number of have factors, including heavy reliance on exports, low productivity growth and too many low paid jobs, has led the OECD to rank Germany joint last with Luxembourg in its growth projections for the next 50 years. Investment gaps are continuing to grow – certainly the investment rate has been declining for a number of years. In 1999 the country invested 20 percent of its GDP; in 2013 it is down to 17 percent. Germany’s renewal backlog currently amounts to a figure in the region of €1 trillion. Both the public and private sectors have spent far too little on infrastructure, education and industrial plants and machinery for far too long.

Critics in Germany have also expressed frustration at the country’s insistence on investing in high profile infrastructure projects rather than less glamorous but more pressing projects which will better serve the nation economically. Multi-billion euro projects such as the redesigning of the Stuttgart railway station and the construction of a new concert house in Hamburg have drawn the ire of analysts and economists alike. Funds allocated to landmark projects such as these could arguably be better utilised by being invested into modernisation programs such as the proliferation of high speed internet connections nationwide, improving Germany’s network of canals and waterways, or helping to complete the transition to renewable energy systems for electricity and heating supplies. Significant investment is also needed to help improve the energy efficiency of many German buildings – an operation which would ultimately provide cost savings in the future.

Clearly it is a matter of great urgency that Germany deals with its ever expanding investment gap. By ushering in an era of greater investment from both the public and private sectors, Germany would not only strengthen its own economic position, and status as an exporter, but it would also help bolster the finances of the still troubled eurozone, providing much needed impetus for growth across Europe. It is imperative that Germany acts sooner rather than later to utilise its budget surplus, which is expected to reach €28bn for 2017 alone. By investing now, Germany can preserve its own future and that of the wider European economy. Failure to act could ultimately threaten Germany’s prosperity for years to come.

Richard Summerfield