‘Germany has too much red tape. All Germans could be richer’, says leading economist

Could Germany's current economic problems come down to a reluctance to invest in public and private industries?

October 30, 2014

The IMF, the European Commission and the ECB, to name a few, have complained of too little public and private investment in Germany, but the country ranks 111th in the world for ease of starting a business. So is it now red tape that’s holding the country back? World Finance speaks to Holger Schmieding, Chief Economist of Berenberg Bank, to discuss.

World Finance: Holger, is Germany’s weakening economy down to domestic politics?

Holger Schmieding: No, this is not caused by domestic politics. The current weakness is caused by geopolitical concerns, but it is definitely correct, Germany has too much red tape. All Germans could be richer, the economy could be even more dynamic than it is, if it would be easier to start a new business in Germany. Germany could do, like many other countries, with a dose of reforms, but those reforms do little to the short-term business cycle.

The Germans are basically happy

World Finance: Well Germany’s not responding to its slowdown, why?

Holger Schmieding: It doesn’t feel that bad, the slowdown in Germany. Employment continues to rise, there is no unemployment to speak of, public finances are extremely healthy. The Germans are basically happy. If there is a little interruption in the upswing, they think they can take it without having to waste money on accelerated spending. If there’s a good spending project, like repairing bridges, the Germans want to do it, they will do a bit more of it, but there is nothing in the German mindset which suggests that the situation is so bad that we now just have to take some money, spend it on a great project whether it’s useful or not just for the sake of creating some jobs, there is no appetite for a fiscal stimulus, the Germans don’t feel a crisis which would warrant such a weird response.

World Finance: Well last year, Angela Merkel and a number of Germany’s commercial leaders argues that America’s NSA surveillance was detrimental to the former competitive standing on global markets. Would you suggest we’re now seeing this play out?

Holger Schmieding: No. Industrial espionage is probably an issue that has been around for decades, if not for much much longer. Unfortunately it may still be around in a while. These are things which can make marginal differences for the longer term, but this is not an issue which drives the short term business cycle.

World Finance: So why are we seeing then so little private investment?

We will have a problem in Germany coming out of that in the sense that unqualified people will find it more difficult to get a job

Holger Schmieding: We are seeing private investment in Germany. The real estate market is doing pretty well. Secondly, we had a significant uptake in German business investment on plant equipment and the like until about April this year, and then came geopolitical concerns, Putin’s war against Ukraine, which made German businesses more cautious. As a result of this caution, they are now delaying some investment decisions. We have to wait for these exaggerated concerns to fade away, and they probably have started to fade away, and with a lag of one to two quarters thereafter, we will likely see a rebound in German private investment.

World Finance: Well we’ve heard a lot about Germany’s minimum wage and other socialist policies such as lowering the retirement age. What impact have these had?

Holger Schmieding: These new sort-of socialist policies are probably a small reason for less happy businesses. The real concern in the labour market for most German companies remains that they would love to have more qualified people whom they could hire, rather than their wages are too high. We will have a problem in Germany coming out of that in the sense that unqualified people will find it more difficult to get a job, because the wages they will have to demand will be higher with the minimum wage, but that is a fringe problem for parts of the labour market. Most German companies are looking for qualified labour to hire, they are paying far above the minimum wage anyway, and so most German companies will not be affected in a meaningful way by this, at least for quite a while.

World Finance: Holger, thank you.