Mammoth re-engineering project begins: Germany

News conference following Germany's federal and state leaders discussion on COVID-19 pandemic situation
German Chancellor Olaf Scholz speaks at a news conference following a virtual meeting with Germany's federal state premiers to discuss the country's strategy against the spread of the coronavirus disease (COVID-19) pandemic, in Berlin, Germany December 21, 2021. Bernd von Jutrczenka/Pool via REUTERS

LONDON, Dec 28 (Reuters Breakingviews) - Germany is turning over a new leaf. Its new chancellor, Olaf Scholz, wants a greener and more digital economy, and so do corporate titans like Volkswagen (VOWG_p.DE) and Siemens (SIEGn.DE). Their combined efforts will launch a complete revamp of Europe’s biggest economy.

Failure to do so would spell decline for German companies and jobs losses for their workers, but the task is a mammoth one. The country is more dependent on making things and shipping them abroad than other major European economies. Exports of goods account for more than a third of its GDP, twice the proportion for France or Britain. Meanwhile German manufacturing contributes 18% to economic output, twice as much as is the case for the other two major European industrial nations. The reliance on fossil fuel-intensive heavy industry partly explains why Germany’s carbon emissions per head of population were 87% above the comparable figure for France and 59% above Britain’s in 2018.

Vast public and private investment will be required to retool such an economy. Take cleaning up the car industry. VW’s capital expenditure bill will surpass 20 billion euros in 2022, according to the Refinitiv median estimate, compared with an annual average of 13 billion euros between 2018 and 2020. Building a local plant to produce battery cells could cost at least the same again, which means Chief Executive Herbert Diess will probably need the government’s help. Scholz will have to find a way of squaring that with his own restrictive budget pledges.

Germany’s digital infrastructure could also use a jolt. Fewer than one in 10 households are connected to full-fibre broadband, but state-backed Deutsche Telekom (DTEGn.DE) can help fix that. And the country needs to attract tech-savvy workers from overseas as its population ages. Scholz can help by relaxing rules for work permits for skilled labour while large companies like Siemens do their bit by retraining existing employees.

The desire to deliver all this will have to be strong to overcome some short-term hurdles. A global supply chain crisis is pushing up producer prices. Meanwhile, Scholz’s plan to increase the minimum wage to 12 euros per hour and labour shortages will push up wage costs. All this will eat into companies’ profit margins. But there won’t be any long-term gains without some short-term pain.

(This is a Breakingviews prediction for 2022. To see more of our predictions, click here.)

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- Social Democrat Olaf Scholz became Germany’s chancellor on Dec. 8, ending 16 years of conservative rule under Angela Merkel and launching a three-way coalition that includes the Green party and the economically liberal Free Democrats.

- Scholz has pledged to make the 2020s a “decade of investment in the future” focusing on climate protection, digitalisation, education, research and infrastructure, according to the three parties’ coalition agreement.

Editing by Swaha Pattanaik and Thomas Shum

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