LONDON (Reuters Breakingviews) – Germany is turning a new leaf. Its new chancellor, Olaf Scholz, wants a greener and more digital economy, as do corporate giants like Volkswagen and Siemens. Their combined efforts will launch a complete overhaul of Europe’s largest economy.
Failure to do so would mean decline for German companies and job losses for their workers, but the task is enormous. The country is more dependent on overseas manufacturing and shipping than other major European economies. Exports of goods represent more than a third of its GDP, which is double that of France or Great Britain. Meanwhile, German manufacturing industry contributes 18% of economic output, twice as much as in the other two major European industrial nations. Dependence on fossil fuel-intensive heavy industry is part of the reason why Germany’s carbon emissions per capita were 87% higher than the comparable figure for France and 59% higher than for France. Great Britain in 2018.
Vast public and private investments will be needed to re-equip such an economy. Take the cleaning of the auto industry. VW’s investment bill will exceed 20 billion euros in 2022, according to Refinitiv’s median estimate, against an annual average of 13 billion euros between 2018 and 2020. Build a local factory to produce battery cells could cost at least the same price again, which means managing director Herbert Diess will likely need government help. Scholz will have to find a way to match that with his own restrictive budget promises.
Germany’s digital infrastructure could also suffer a shock. Less than one in 10 households is connected https://www.ftthcouncil.eu/knowledge-centre/all-publications-and-assets/246/ftth-forecast-for-europe-market-forecasts-2021-2026 broadband fiber, but state-backed Deutsche Telekom can help solve this problem. And the country must attract tech-savvy overseas workers as its population ages. Scholz can help by relaxing the rules on work permits for skilled workers while large companies like Siemens are doing their part by retraining existing employees.
The desire to deliver all of this will have to be strong to overcome some obstacles in the short term. A global supply chain crisis is driving up producer prices. Meanwhile, Scholz’s plan to raise the minimum wage to 12 euros an hour and labor shortages will drive up wage costs. All of this will weigh on the profit margins of companies. But there won’t be long-term gains without short-term pain.
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– Social Democrat Olaf Scholz became German Chancellor on December 8, ending 16 years of conservative rule under Angela Merkel and launching a three-party coalition that includes the Green Party and the economically liberal Liberal Democrats.
– Scholz pledged to make the 2020s a “decade of investing in the future” focused on climate protection, digitization, education, research and infrastructure, according to the coalition agreement of the three gone.
(Edited by Swaha Pattanaik and Thomas Shum)
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