German Election Monitor No. 2: What important issues should politicians debate?

• Angela Merkel is still on track to secure her fourth term in office, as polls have changed little since the TV debate. We continue to see another grand coalition of the CDU and SPD as the most likely outcome.
• However, in the current ‘sleepy campaign’, German politicians risk neglecting a thorough debate about measures to enhance future potential growth during timesof economic strength.
• Initiatives to address the infrastructure backlog, deepen eurozone integration and solutions to demographic challenges should feature more prominently in thepolitical debate.

Sleepy election campaign lacks debate on structural reforms

As we have argued in German Election Monitor No. 1, the market impact of the upcoming German election will be limited as it is likely to result in a broad status-quo in terms of domestic policies and with negligible risk of a euro-sceptic government
emerging. However, we think the future economic direction for Germany and more importantly further eurozone integration will be hugely important in the aftermathof the election.

The TV debate between Angela Merkel and Martin Schulz on 3 September centred mainly on immigration, inner security and Turkey. Economic and fiscal policy topics, on the other hand, remained broadly absent in line with a general complacency of politicians about the structural outlook for the German economy. By neglecting a thorough debate about measures to enhance future potential growth during times of economic strength, German politicians risk missing opportunities to prepare the country for future social, economic and political challenges lying ahead. Therefore, in this German election monitor, we look at some of the most pressing issues that politicians will have to deal with.

1. Infrastructure backlog

There have been repeated calls for Germany to raise its investment rates. DIW, a German think tank, estimates that the backlog in private and public investment is c.EUR75bn, roughly 3% of GDP, and argues that due to this lack of investment Germany foregoes growth of about 0.6% of GDP each year. More investment in energy, infrastructure and education are particularly pressing, in light of crumbling roads and schools. More broadly, inducing private investment is also seen as important to reduce the huge external surpluses and support recovery in the eurozone (see IMF Article IV report May 2017). The lack of infrastructure investment in the past few years has been more due to coordination issues between different public and private takeholders and tight communal budgets, rather than lack of fiscal space: the general government budget surplus stood at 0.8% of GDP in 2016 and public debt is a mere 68% of GDP and has been on a declining path ever since 2012. However, the problem is that communal and federal budgets are constrainedby the ‘debt brake’ (see factbox below), which historically has affected investment more than social spending.

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