Squabbling Economists

To Spend or Not to Spend

  • Why it matters

    Why it matters

    The commission’s recommendations are supposed to help determine the next government’s approach to investment.

  • Facts

    Facts

    • Economics minister and SPD leader Sigmar Gabriel has assembled a group of economists to look at how Germany can boost investments.
    • Divisions have emerged between those who want the federal government to increased public investment and those who oppose this.
    • The group is due to present its next report in November, but it may be difficult to reach a consensus.
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  • Audio

    Audio

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Marcel Fratzscher and Lars Feld are at loggerheads. Source: Quelle Claudia Zurlo/ Pr [M]

Discord has been notorious in the so-called “Fratzscher Commission,” a team of economic experts assembled by the economics minister and vice chancellor, Sigmar Gabriel, to look at how Germany can boost investments. The commission is slated to present its next round of proposals at the beginning of November, but tensions have reached a boiling point.

In an internal email sent to all members of the commission, which Handelsblatt has seen, economic expert Lars Feld addresses the group’s head, president of the economic research institute DIW, Marcel Fratzscher. Mr. Feld denounces the approach of the commission thus far as “misleading” and “absurd,” particularly in its proposals for an “Investment Agenda Germany.” For Mr. Feld, “the dissent is too fundamental” to support the proposal.

Such a direct attack is unusual among top economists, but the divide in opinion is pervasive throughout the commission.

Mr. Fratzscher and Mr. Feld represent two different schools of thought, around which others in the group also align themselves. Mr. Fratzscher is known for his leanings towards the center-left Social Democratic party, which is led by Mr. Gabriel. While the SPD wishes to further increase public investment after next year’s federal elections, many in the center-right camp, to which Mr. Feld belongs, reject this approach, hoping instead to improve the framework for private investment. The dispute speaks to a bigger issue to be addressed after the election: should the state spend more money or not?

When Mr. Gabriel commissioned Mr. Fratzscher to head the commission back in 2014, it was quite an boon for the head of the Berlin-based DIW. Then Mr. Gabriel gathered the real “who’s who” of the German economy: Deutsche Bank’s then chief executive Jürgen Fitschen, the heads of trade unions and employer associations, and many other high-profile experts. In April 2015, the commission issued its first report.

 

“The commission is going in the completely wrong direction.”

Lars Feld, Member of the Commission

Having already filed that report, some consider the commission’s work to be complete, and question the need for another report a year and a half later. Those in the center-right camp suspect that Mr. Fratzscher seeks to use the commission to develop ideas for the Social Democrats in their federal election campaign. Mr. Fratzscher contests this: “The commission already stated during our initial review that we would like to monitor and guide the process of implementation,” he said. Multiple commission members have confirmed this.

When Mr. Fratzscher submitted the first draft of the commission’s latest report on October 2, Mr. Feld and the employers’ associations took major issue with several proposals. Mr. Feld contests the assertion that Germany’s debt break “has a negative impact on public investment,” and he argues that the problems in infrastructure could “not be solved by means of additional federal funding.” He argues that a clear distribution of competences between the federal government and federal states is needed.

 

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But the biggest point of disagreement in the report is over the notion of an “investment agenda,” a kind of central planning hub for investments. The idea is that the federal government would create a “concrete, coordinated plan to strengthen the social, physical, and regulatory infrastructure.” With this proposal, “the commission is going in the completely wrong direction,” Mr. Feld writes. The idea would even “cancel out constitutionally-granted municipal autonomy.” Mr. Feld’s criticism was shared by the employers’ associations.

Mr. Fratzscher is accustomed to this kind of criticism, knowing full well that it would be impossible to prevent disputes within such a heterogeneous group. Shortly before the commission presented its results, the trade unions also pulled out and issued a dissenting opinion. This time, the criticism came from the center-right camp as well as the employers.

Originally, the commission hoped to present its new report at the beginning of November — whether this will happen remains unclear. Mr. Fratzscher will soon send a revised draft of the report to his fellow commissioners. It may well be that the concept of an “investment agenda” is no longer present within the proposals, as the project head is trying to create consensus within the group. “The federal government has enough money to invest, but many municipalities do not have the capacity to implement major construction projects,” he says.

But the work of the commission relates to much deeper questions about the German economy. Strengthening investment and its framework conditions is one of the core projects of Mr. Gabriel, who staffed the commission with such high-profile players in hopes of bringing due attention to the issue. Still, the team will have to deliver concrete measures. Otherwise Mr. Gabriel could catch flak for letting a group of experts allow an important issue to descend into a bitter squabble.

 

Martin Greive is a correspondent based in Berlin. To contact him: m.greive@vhb.de

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