Economic imbalance Get your act together, Brussels tells Berlin

The EU’s annual report slams Germany for numerous structural failings. These include rising inequality and too little action on climate change.
Quelle: dpa
When you think you're doing everything right and people still complain.
(Source: dpa)

Germany’s economy is growing and exports are booming, unemployment is at a record low, and debt is steadily falling. “All in all, this is a fairly strong performance,” said EU Vice President Valdis Dombrovskis.

But despite this rosy picture, the Latvian politician was far from satisfied with Germany.

On Wednesday, the European Commission presented its annual in-depth reports of 27 EU member states. Not everyone in Germany will be happy with his findings as the Commission didn't pull any punches but took Berlin to task for structural weaknesses.

The Commission has long faulted the country's high current-account surplus. Mr. Dombrovskis noted that while the surplus is gradually falling, it remains above the EU reference value of six percent of GDP. This means Germany remains among the countries which could be subject to EU proceedings over an economic imbalance.

Brussels' criticism is not aimed at Germany's export successes, even though this is sometimes mistakenly claimed in Germany. Rather, the report criticizes the fact that strong German exports are offset by weak domestic demand. An increase in domestic demand would not only strengthen the German economy, but also “stimulate growth in other EU countries,” the Commission said. In particular, this could help countries needing to reduce high government debt.

The Commission is unimpressed with income growth in Germany.

The Commission lists several causes of Germany's weak demand. Growing income inequality may have a negative impact on private consumption and thus indirectly dampen import demand. An aging population and the fear of old-age poverty in turn stimulate Germans’ famous propensity for saving, indirectly driving up the current-account surplus.

According to Mr. Dombrovskis, there is also still plenty of room to increase investment demand. The shortage of skilled labor, the tax system and the bureaucratic burden have a negative impact on private investment. The government still spends too little on education and infrastructure. Generally, investment is stagnating across the board, at federal, state and municipal government level.

Germany’s tax and social security system were also criticized. The EU has long charged that Germany puts too a high tax burden on small incomes. This creates a disincentive to take up work, even though the country urgently needs workers. And besides, comparatively low inheritance and gift taxes “preserve unequal wealth distribution” over generations, according to the report.

The Commission was also unimpressed with income growth in Germany. Despite low unemployment and the large number of job vacancies, wage growth has remained weak. And furthermore, the reduction in statutory pensions increases the risk of poverty, especially for low-income workers and women. The gap between the pensions for men and women is wider in Germany than almost anywhere else in the EU.

23 p07 Germany lags behind-01

While fighting climate change is one of the overriding priorities of global policymaking, the Commission said Berlin should do more. The energy transition and switch to renewables have slowed considerably and authorities don't focus on energy efficiency. Furthermore, Germany isn't achieving its own targets for reducing carbon emissions, and has been slow to reduce traffic-generated air pollution.

Lastly, the report notes that Germany lags behind in expanding high-speed internet access. Only a small part of the country has fiber optic networks and Berlin instead wants to upgrade outdated copper cables. But these aren't fast enough for many internet companies, which then limit their investments in the country.

It isn't a particularly good report card for Chancellor Angela Merkel and her outgoing government. The new coalition cabinet better roll its sleeves up, there's plenty on its plate.

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author: [email protected]