SIGMAR GABRIEL The Economists Strike Back

Ahead of state elections in less than two weeks, Social Democrat chief Sigmar Gabriel has called for greater social spending on Germans to ease tensions over the integration of refugees. Leading economists have slammed the vice chancellor's proposal as fiscally irresponsible.
Mr. Gabriel would like to spend more of Germany's €20 billion surplus on its

Several leading economists have condemned plans by Vice Chancellor Sigmar Gabriel to increase social spending on Germans as a strategy to stem right-wing resentment over the billions allocated to integrate refugees into society.

Mr. Gabriel, who is also leader of the center-left Social Democrats, the junior partner in Germany's grand coalition, called for expanding tax-payer funded daycare and subsidized housing and also increasing pensions.

According to Handelsblatt's sources within the party, Mr. Gabriel's "social pact" would cost about €5 billion, or $5.4 billion, and the funding would come from reserves built into Germany's budget.

But many economists say this approach is irresponsible.

We shouldn't act like the money spent on refugees is disappearing into a black hole. These are investments in our own future and those of the refugees. Marcel Fratzscher, German Institute for Economic Research

"You can't answer feelings with money, only with clear words, education and robust positions,"  Michael Hüther, an analyst with the Cologne Institute for Economic Research, told Handelsblatt. "Nothing has been taken from Germans, but we can all win if we successfully integrate refugees."

With public spending on refugees expected to reach €28 billion by 2017, Mr. Hüther said some Germans have a "feeling of loss."  But responding to this sentiment with money, he added, risks sacrificing budget discipline to "the call of the street."

Clemens Fuest, president of the Centre for European Economic Research, said Mr. Gabriel's social pact is "misleading" and "can only be an election campaign gag."

Because Germans would still "have to pay back the debt," he told Handelsblatt,  in terms of economic policy, "it would be damaging to saddle ourselves with more spending financed through debt."

Marcel Fratzscher, president of the German Institute for Economic Research, warned against stoking a "redistribution struggle" between Germans and refugees.

There appears no end to the number of refugees in Germany.

 

"We shouldn't act like the money spent on refugees is disappearing into a black hole," Mr. Fratzscher said. "These are investments in our own future and those of the refugees."

He not only condemned Mr. Gabriel's social pact, but also rejected Mr. Schäuble's proposal to finance the integration of refugees by raising taxes. Germany had a €20 billion surplus in 2015.

"Both would signal to the people that they have to fear economic disadvantages from the refugees," Mr. Fratzscher told Handelsblatt.

Katharina Barley, general secretary of the Social Democrats, said the party was "very surprised" by the "very intense reaction" to Mr. Gabriel's social pact. Raising pensions in eastern Germany to match those in the western states, for example, is written into the coalition agreement, she noted.

"We are not belittling ourselves," Ms. Barley said, referring to a comment made by Chancellor Angela Merkel in a TV interview on Sunday night about Mr. Gabriel belittling himself with his demands. "We stand for the principle that pensions should not be reduced further."

While many economists have dismissed the social pact, the German Trade Union Confederation has come to the defense of the SPD.

The goal of a debt-free budget "is an irresponsible maxim of financial policy," said Stefan Körzell, a member of the confederation's board. The trade unions have called for more debt to finance infrastructure.

Some Christian Democrats in eastern Germany agree with the Social Democrats. The conservative premier of Saxony-Anhalt, Reiner Haseloff, believes the inequality faced by pensioners in the eastern states should be reduced through a federal subsidy of €6 billion.

The money would come from the €20 billion budget surplus, Mr. Haseloff said, the remainder used for integrating refugees.

With regional elections scheduled for March 13 in the states of Baden-Württemberg, Rhineland-Palatinate and Saxony-Anhalt, fear has gripped the coalition.

Both the Christian Democratic Union and its Bavarian sister party the Christian Social Union on the one side and the Social Democracts on the other have seen support slide in recent months as the far-right populist Alternative for Germany, the AfD, make gains amid worries about the refugee crisis.

“The mood is explosive,” said a leading conservative politician, who asked to remain anonymous.

The result has been a virtual halt to coalition initiatives as both sides block each other on big issues such as the regulation of temporary work, changes to the inheritance tax and action on pensions and state-supported supplementary benefits.

 

Heike Anger covers economics and politics for Handelsblatt. Daniel Delhaes reports on politics, transport and airlines from Handelsblatt's Berlin office. Jan Hildebrand leads Handelsblatt's financial policy coverage and is deputy Berlin bureau chief. To contact the authors: [email protected][email protected] and [email protected]