Evan Vitale Consulting: German business and government

Friday, October 17, 2014

German business and government – The Economist

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Who will trumpet German business?

A REPORT bemoaning the lack of transparency surrounding the influence of business on German politics, published on October 13th by Transparency International, a corruption watchdog, must have struck lobbyists as dark humour. The customarily close relationship may be opaque but it is scarcely yielding results. Businessmen have rarely felt more aggrieved by public policy, which they feel is doing little to help as the economy stumbles.

On October 14th, the government slashed its growth forecasts to a laggardly 1.2% for this year, and 1.3% in 2015. Geopolitical uncertainty, especially the Ukraine conflict, is clouding export forecasts. Exports are now expected to grow by just 3.4% this year and 4.1% in 2015. That is slower than world trade, and will eat into Germany’s share.

Investors and businesses are alarmed. After briefly topping 10,000 in the summer the DAX index of big stocks has since fallen by over 14%. The Ifo index, a closely watched measure of the business climate, has dropped since April, to its lowest point since April 2013. Though construction is holding up, manufacturing, retailing and wholesaling are feeling the pain. The ZEW index, which gauges investor confidence, is also on a long slide. From a peak in January it slipped into negative territory in October for the first time in almost two years.

The sudden slowdown comes on top of what many German firms already deemed to be a worsening environment. Last year’s election result was bad news for business. The new government promised expanded pensions, a minimum wage, a quota for women on boards and road tolls for foreign drivers. Ms Merkel’s centre-right alliance had to join the centre-left Social Democratic Party (SPD) in a grand coalition in which the latter’s less business-friendly attitude seems to have the upper hand.

Two longer-term problems make the outlook cloudier still. The first is an investment shortfall. Germany’s capital stock is depreciating faster than investments are replacing it. The government has promised €5 billion ($6.4 billion) in new spending on roads, railways and the like by 2017. Critics say much more is needed and gripe that the government’s obsession with achieving the first balanced budget since 1969 is making vital spending impossible. Many companies are investing abroad, citing a warmer welcome and misgivings over future policy at home.

Energy policy also makes firms apprehensive. Germany’s Energiewende aims to replace fossil fuels and nuclear power with renewables. This has led to sky-high prices. At the same time overcapacity and plunging wholesale prices for energy from fossil fuels threaten conventional power companies with collapse.

Sigmar Gabriel, the vice-chancellor and SPD leader, added energy to his economy portfolio upon taking office. Company lobbyists say he is intelligent and driven, and that he understands the gravity of the situation. But his first energy reforms only nibbled at the problems and few believe he will come up with anything truly bold.

Ms Merkel is at least showing signs of renewing her focus on the economy. Friedrich Merz, a senior economic thinker in the CDU, was named on October 13th to the party’s “future commission”, which has the job of coming up with big ideas. The CDU has said that all government promises that threaten to harm the economy may be revisited, giving the quota for women on boards as an example.

That might have to be enough for German business. The country lacks a more pro-market alternative. The liberal Free Democrats are on a losing streak, failing to make it into parliament last year. The new Alternative for Germany scares business by wanting to pull out of the euro and flirting with xenophobia. The Greens never saw a paternalist regulation they did not like and the Left party is overtly hostile to free enterprise. The two big parties, however flawed, are the only game in town.

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