Germany’s spending gamble | FT Film

For many years, Germany adhered to a strict ideology of austerity, resulting in a deteriorating infrastructure and an outdated business model. The country's infrastructure, including roads, schools, and trains, is visibly crumbling, leading to daily frustrations and inefficiencies. In response to this crisis, Germany is now embarking on a transformative journey, committing 500 billion euros over twelve years to modernize its aging infrastructure and revitalize its economy. This ambitious plan also includes significant changes to defense spending, marking a seismic shift in the nation's fiscal policy.

The push into defense, a move some economists view as a significant opportunity for industries like car manufacturing, is also critical for Germany's and Europe's revitalization.

A commentator noted, "You want to have a country that works."

The German government, under Chancellor Olaf Scholz, has established an ad-hoc fund of 500 billion euros to modernize and renovate the country's aging infrastructure, including roads, hospitals, and schools. A second major change involves granting the government legal leeway to spend as much as it deems necessary on defense, free from the previous debt constraints. The fundamental goal behind these measures is to significantly increase public investment, which has been under-supplied in Germany, and stimulate economic growth.

This strategy is a considerable gamble given the massive financial commitment.

Germany's economic model has faced several critical challenges that necessitate this shift:

These factors collectively indicate a failed or outdated German model that urgently requires a comprehensive rework to adapt to current global realities.

Understanding the 'debt brake' requires revisiting post-war Germany's ideological foundations. Economic policies were meticulously crafted to achieve stability, a stark contrast to the instability of the interwar period which was believed to have facilitated Hitler's rise. This historical context fostered a deep-seated commitment to monetary stability, exemplified by the creation of the Bundesbank as an independent central bank. Germans also held profound concerns that poor fiscal policy, marked by excessive debts and deficits, could destabilize the economy and trigger inflation.

The debt brake itself was enshrined in the constitution in 2009 amidst the global financial crisis. It was intended as a permanent mechanism to cap borrowing at 0.35% of GDP annually, while federal states were prohibited from incurring any debt. This measure solidified a conservative mindset focused on absolute fiscal and monetary stability, a response to the need for large-scale spending during the crisis, but with a promise to never accumulate such debt again.

The decision to amend the constitution and reform the debt brake was an audacious move. It was rushed through a brief window between the election and the formation of a new government, requiring a two-thirds majority in parliament. This change was deemed necessary due to Germany's almost rotten infrastructure, its significant defense obligations, particularly with Russia seen as a threat and the United States no longer a fully reliable ally, and its fundamentally flawed business model.

Following the fall of the Berlin Wall, Germany's defense policy underwent a radical transformation. For many years, the prevailing political sentiment was that a territorial defense force was unnecessary; instead, the focus shifted to overseas operations, exemplified by missions in Afghanistan. This led to the abolition of conscription and a significant shrinking of the army, with Germany largely relying on the United States and NATO for its security. This passive stance was partly influenced by Germany’s fraught history, particularly its central role in World War II and the Nazi regime.

The full-scale invasion of Ukraine by Russia in 2022 fundamentally altered this political perspective, forcing Germany to confront new realities.

The shift away from US reliability as the cornerstone of European security demands a robust response from Europe to prevent fragmentation. For Germany, this is critical due to its central geographical position and its history of being surrounded by neighbors. Now, for the first time, its neighbors are all friendly and bound by the EU treaty. Protecting this unity and its own security requires Germany, as the largest economy, to take leadership and significantly increase defense spending, as evidenced by the severe lack of operational helicopters and jets.

The direct economic spillovers from defense investment are relatively limited. However, some economists view this push into defense as a significant opportunity for car makers facing structural shifts, as many suppliers for the automotive industry can also pivot to serve the defense sector.

Failure to increase defense spending would leave Germany vulnerable, risking a withdrawal of US commitment to NATO and emboldening Russia. This could potentially lead to the breakup of the EU if member states, perceiving weakness, seek independent deals with Russia. Therefore, building up defense capacity and spending money is not merely an option but a critical imperative with no viable alternative.

Germany's train system is currently highly dysfunctional, with trains frequently running late due to a severe lack of investment and insufficient personnel. Despite a rising demand for train travel, driven by climate change concerns and a deliberate shift away from domestic flights, the unreliability forces people back to cars or planes, causing widespread frustration. This poor performance contradicts Germany's core identity of efficiency and punctuality, becoming a source of national embarrassment, with the Swiss even stopping German trains at the border to protect their own punctuality.

Laura, a commuter, shared her daily struggle: "When I make it on time, I want the lotto."

The problems extend beyond aging infrastructure; the system is also heavily congested. Frequent delays, sometimes lasting 20 or 30 minutes, are common. Although one-third of long-distance trains are delayed, meaning two-thirds are still punctual, this is not sufficient for public expectations. Punctuality statistics are worsened by the fact that only trains more than 6 minutes late are counted, excluding numerous cancellations from official figures.

While Germany invested a record 19 billion euros in 2024 for infrastructure renovation, improvements will not be immediate but are expected within a few years. However, the renovation process faces significant challenges, including bureaucratic hurdles and a question of capacity. Years of underinvestment have shrunken relevant industries, making it difficult to mobilize sufficient construction companies and potentially leading to price increases due to labor shortages.

Schools, a fundamental component of public infrastructure, are also in a state of disrepair. In Frankfurt alone, approximately 60 schools are reportedly falling apart, posing safety risks that have led to the need for support pillars and even pieces of roofs collapsing. This dire situation is not confined to Frankfurt but extends across Germany.

A major challenge in addressing this issue stems from Germany's highly decentralized governance structure. When the federal government allocates funds for local municipalities, the money must first pass through the states. The states, however, are often "sticky," meaning that not all the allocated funds necessarily reach the intended local municipalities. This creates bottlenecks in the distribution of crucial investment capital.

To ensure accountability and effective utilization of funds, the German Ministry of Finance plans to rigorously monitor how other ministries spend this money. The objective is to guarantee that the funds are used exclusively for investment purposes, rather than for consumption. Furthermore, any money disbursed to municipalities and regions will be subject to strict conditionality, ensuring that the investments align with structural reforms and achieve their intended impact.

A significant portion of Germany's roads and bridges, predominantly constructed in the 1960s and 1970s, are now exhibiting severe cracks and signs of advanced age. This widespread deterioration is undermining the country's once-vaunted engineering reputation.

A particularly striking and humiliating example of this infrastructure crisis is a bridge near Dresden, which literally collapsed in 2024 and remains unrestored. This incident sent a significant shockwave through the system and further damaged the perception of Germany as an engineering powerhouse, highlighting the urgent need for comprehensive renovation.

Germany faces significant risks beyond its physical infrastructure, primarily an aging population that is driving up social costs. Despite these challenges, the country possesses substantial untapped potential for growth. This includes better integration of women into the labor force, enabling them to work more, and leveraging migration effectively. While migration is often discussed negatively, it can be hugely beneficial for an aging population by introducing younger people into the workforce. However, Germany has yet to fully capitalize on these demographic opportunities.

The nation's high labor costs, stemming from a high standard of social security, necessitate a highly productive workforce. Achieving this productivity relies heavily on a good education system and the effective integration of migrants through German language acquisition and necessary qualifications. Failure to do so risks migrants ending up in the benefit system, posing a significant fiscal and social burden. There is also a distinct risk of inflation picking up, which is a major concern for Germans, implying that this investment strategy is not without its costs.

The success of Germany's massive investment plan carries significant political implications. If the allocated funds are not spent wisely, the far-right Alternative for Germany (AFD) party, currently the second-largest force in parliament, stands to benefit. There is a tangible risk of the AFD fueling a narrative that the 500 billion euros are being wasted, especially if the government fails to demonstrate tangible improvements in infrastructure and increased public investment over the years.

This makes it critically important that the money is used exclusively for investment purposes.

A political analyst emphasized, "That investment in our public goods and our infrastructure is an investment in democracy."

The major danger is that citizens may observe substantial spending on the military and support for Ukraine, yet fail to see corresponding improvements at the local level—in their schools, communities, and other areas that directly enhance daily life. Such a disparity could ignite widespread public anger. Conversely, if people experience real differences, such as punctual trains and renovated schools, it could restore their faith in democracy and, in turn, reduce support for the AFD.

The long-held belief in austerity, which governed Germany for many years under conservative and neoliberal politicians, has left the country with a sense of shame over its neglected infrastructure. The new commitment of 500 billion euros is intended to restore Germany's reputation for punctuality and efficiency, though it will take considerable time for these funds to be fully disbursed and their effects to materialize. This undertaking is undoubtedly a gamble, but one that is deemed essential, as the alternative of inaction would lead to a bleak future.

Germany, despite its recent missteps, remains a wealthy nation that has made significant policy errors in the past, including an overly tight fiscal policy for an extended period and excessive reliance on foreign demand. The rise of China as a dominant manufacturing and exporting power now poses a direct threat to Germany's industrial landscape.

This bold investment is expected to significantly improve prospects for GDP growth and the broader economy. It also presents an opportunity for Germany to assert its leadership in Europe by spearheading investment spending, thereby helping to revive the European economy, which largely depends on Germany's strength. However, this revitalization effort must extend beyond mere infrastructure spending.

Public services such as education and childcare have also suffered from austerity measures. Investing in these areas is crucial for properly boosting the labor market and fostering sustainable growth. Making Europe strong is now Germany's vital national priority, inextricably linked to strengthening its own economy and defense capabilities. Not undertaking this initiative would be catastrophic for both Germany and Europe. The belief remains that Germans possess the necessary seriousness and competence to succeed, driven by the sheer necessity of the situation amidst challenging geopolitical tensions and the prospect of an adversarial US presidency.