Naughty, naughty

EU scolds Germany (again) for low investment, high taxes, and more

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Come again? Didn’t quite catch that. Source: Reuters

Just because it’s toothless doesn’t keep the European Commission from gnawing away at problems it sees with Germany’s economic policies. Brussels’ annual review once again scolded Berlin for not investing enough, as well as for deficiencies in its tax system and education spending.

The European Union has been moaning for years that Germany’s current-account surplus is an unacceptable imbalance in the bloc. This is not – contrary to popular opinion in Germany itself – a criticism of the nation’s success in exports. Rather, it’s a complaint that Germany consumes and invests too little, and as a result, doesn’t import enough from other EU countries.

Numerous other authorities, from the OECD to the IMF, have voiced similar complaints. But they have always fallen on deaf ears because of Berlin’s obsession with a balanced budget and its pride when it produces a surplus. There is no reason to believe the new government will be any more responsive to the EU’s latest assessment. Aside from its public scolding, the commission has little leverage to make its criticisms bite.

The percentage of public spending in Germany that goes to investment is well below the EU average, the commission griped. It’s an inconvenient truth in a country where tax revenues are constantly on the rise and there is virtually no expense for unemployment benefits.

“The European Commission hit the nail on the head.”

Joachim Lang, director general, BDI

The commission also had harsh words for the German tax system. Personal income and profits are highly taxed, while levies on inheritance, consumption and property are light. It should be the other way around, the commission said. Especially the effective corporate tax rate of 28.2 percent, with a commercial tax and the so-called solidarity tax on top of it, hems in corporations with bureaucracy and stifles investment.

“The European Commission hit the nail on the head,” said Joachim Lang, director general of the industry lobby BDI, in a rare show of agreement with Brussels.

The commission also criticized Germany’s lower-than-average spending on education. It falls far short even of the government’s declared target of 10 percent of GDP for research and education. Another €33 billion beyond current spending plans would be needed to reach that goal, the commission said.

If those complaints result primarily from Berlin’s balanced budget, the critique about Germany’s lagging in broadband performance can be laid at the feet of Deutsche Telekom. The longtime monopoly provider chose to augment its existing copper wire network rather than invest in the more robust optic fiber. As a result, only 7.3 percent of the country is covered by optic fiber, while small and medium-sized companies outside of urban areas are stuck with slow internet connections that inhibit investment.

Only 7.3 percent of Germany is covered by optic-fiber networks for broadband internet.

Mr. Lang from the BDI welcomed the commission’s admonishment on taxes and investment spending. The new government’s first budget actually reduced investment spending in spite of campaign pledges to boost government spending in digital infrastructure, research and education. “German industry expects more ambition from the government,” Mr. Lang said.

The bottom line for the commission was that Germany should invest more, revamp its tax system to encourage growth, reduce the tax burden on low incomes and promote higher wages.

The new finance minister, Olaf Scholz, has shown himself singularly unimaginative in addressing any of these needs, even though, unlike his conservative predecessor, he is a Social Democrat. German industry, for its part, expected the new grand coalition to be disappointing, and feel these expectations are confirmed.

Ruth Berschens is Brussels correspondent for Handelsblatt. Darrell Delamaide is a writer and editor for Handelsblatt Global in Washington, DC. To contact the authors: berschens@handelsblatt.com and d.delamaide@extern.handelsblatt.com

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