Purse Strings

Wiggle Room for Sovereign Debt

Baustelle Warschauer Straße in Berlin-Friedrichshain
Is it advisable to finance investments in infrastructure with public debt?
  • Why it matters

    Why it matters

    As calls increase for more public investment projects in the European Union, Germany must consider how best to finance the renovation of its crumbling infrastructure without deviating from its goal of a balanced budget by 2015.

  • Facts

    Facts

    • Germany reached the E.U. target of spending at least three percent of its GDP on research and development last year.
    • The original cost estimate for the new Berlin airport was €1.7 billion ($2.18 billion). It is now €5.4 billion.
    • German Finance Minister Wolfgang Schäuble wants to achieve a balanced budget by 2015.
  • Audio

    Audio

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Politicians in Europe have a new pet project: More investment. Germany is being accused of neglecting its infrastructure and doing too little to spur economic growth in Europe, and the federal government is being urged to abandon its goal of a balanced budget in 2015 and spend more money on roads, bridges and other projects.

This raises two questions. Should the German government invest more? And, is it advisable to finance those investments with public debt?

It is indisputable that the state can no longer put off repairing dilapidated roads and buildings. Nevertheless, the investment gap in Germany is not as large as is often claimed. Higher rates of investment in other European countries can be explained, in part, by the rise in building costs during the debt-driven building boom. Additionally, Germany already has a highly developed infrastructure and a saturation effect occurs.

Besides, Germany isn’t lagging behind everywhere. For example, the goal set by the European Union that each member country spends at least three percent of its GDP on research and development was reached by Germany in 2013, well above the E.U. average of only two percent.

Infrastructure projects must be carefully planned and closely monitored. Need I mention the Berlin airport? It was meant to open on June 3, 2012, but due to insufficiently monitored construction, it couldn’t pass inspection and is now not expected to open until after 2017. The original cost estimate was €1.7 billion ($2.18 billion) and is currently at €5.4 billion ($6.91 billion). We’ve learned from this debacle that limits on increases in expenditures must be set at short notice.

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