If you want to know what is going wrong in Germany in terms of economic policy, you can watch any news programme on the days when the Federal Employment Agency announces the monthly results of the labour market statistics. Take the heute-Journal programme from 28 February this year. Immediately after the moderator announced that the number of unemployed in February was, believe it or not, 180,000 higher than a year earlier, he turned to a report that had absolutely nothing to do with this news item, but was about how some random painting company in some random area in Germany was having trouble finding capable employees. The shortage of skilled labour: that was the end of the unemployment story.
The fact that almost three million people are now officially registered as unemployed and that there are an additional two million in the so-called hidden reserve is simply not newsworthy. The number of vacancies reported by companies to the Federal Employment Agency was 650,000 at the beginning of this year, more than 200,000 below the peak measured after the corona shock in the summer of 2022. That is the finding at issue. Five million people looking for work and 650,000 jobs being offered. In the rest of Europe, the situation is much more serious: unemployment there has hardly fallen since 2010 and is usually far higher than in Germany. In such a situation, the shortage of skilled workers is nothing more than a diversionary tactic. The aim is to make the population believe that there is no such thing as unemployment, but rather, as the CDU announced in the election campaign, only lazy people who avoid taking the large number of vacancies that are offered.
This is precisely where the exploratory paper by the CDU and SPD is fundamentally wrong. Although it briefly mentions the need for growth impulses to create jobs, the problem that it tackles is incentives to accept a job instead of the elimination of the serious lack of jobs. The same applies to investment, which is ultimately needed to create new jobs. The paper states that the government wants to ‘immediately create tangible incentives for corporate investment in Germany after taking office’ and to ‘introduce a corporate tax reform’.
According to surveys of companies by the ifo Institute, German companies are primarily confronted with a lack of demand. This is reflected in the very low utilisation of their capacities. If you want to create incentives for investment, you have to ensure that demand increases across the entire economy and that capacity utilisation rises as a result. Holding out the prospect of a corporate tax cut is not helpful at all, because many companies are making losses or profits are under such pressure that they are slashing investment now.
Now the state is running up debts after all
But now the state is getting into debt after all, you might object, in order to boost the economy. That’s true, but the surprising end of the German debt brake is accompanied by very specific tasks that are to be solved by credit-financed government spending. On the one hand, there is a civil engineering funding programme that is to run for ten years and will only have a really positive effect if it is implemented in addition to what is planned anyway. The rest goes largely into military rearmament and has only a very limited impact on the majority of the economy, not to mention the fact that investment in armaments is completely unproductive. It takes a lot of imagination to claim that there are positive technological spill-overs, i.e. effects on the general technological performance of an economy.
In addition, and this is the big unknown, given its fundamental opposition to government debt, this government will do everything it can to make savings in the so-called consumer sector, i.e. in social spending, pensions, etc. All of this would have an immediate negative impact on companies, their demand and their capacity utilisation. If the SPD goes along with this, it is by no means certain that the overall effect of fiscal policy under a Merz government will be positive despite the ‘mega debt’.
An appropriate diagnosis
An appropriate diagnosis must take note of what has happened to real incomes in Germany. Real wages have developed in recent years. From 2020 to 2023, there was only stagnation or decline; in 2022, in particular, these average incomes of the mass of employee households fell by 4 percent. Last year, for the first time since 2020, there was an increase of 3.1 per cent. For 2025, it is already clear that real wages will probably stagnate because the trade unions have adopted an extremely moderate line in the face of rising unemployment and the threat of mass layoffs.
Consequently, domestic demand in Germany is not expected to provide any momentum in the coming years. Exports are also weakening. Nevertheless, Germany still has enormous foreign trade surplus, which is causing suspicion in the US and could provoke further protectionist measures. If the German way of making borrowing more flexible is not quickly adopted throughout Europe, no more than stagnation is to be expected among important neighbouring countries. Since European monetary policy (as recently shown here) will remain on the brakes for some time to come, corporate investment will continue to be the weak spot. In this situation, an unusually large stimulus from the state is needed to get the economy back on a growth path. Whether the stimuli planned by the CDU and SPD will be enough is an open question in view of the many unknown influencing factors.
At present, various experts are outdoing each other in drawing up long lists of measures that would all have to be implemented to get Germany back on track. According to the exploratory paper, the potential coalition partners also believe that many individual measures will ultimately have a major impact. This could quickly prove to be a mistake. If you focus primarily on individual measures and lose sight of the big picture, you will get nowhere.
No macroeconomics
One of the central failures of the coalition government was to largely ignore the macroeconomic picture of the economy and its consequences. It is simply not enough to have an annual economic report written and to hold up a few charts in front of the press, as the former minister used to do. The government must always have its hand on the pulse of the economy and intervene consistently as soon as a weakness such as the rise in unemployment becomes apparent. To do this, you need the appropriate expertise in the Ministry of Economic Affairs and the removal of legal obstacles.
Any kind of debt brake is counterproductive for the state in performing this work. The only sensible solution is therefore to completely abolish this bureaucratic monster. An enormous burden, which is not mentioned at all in the usual commentaries, is the one-sided mandate given to monetary policy in Europe. While monetary policy in the US has an equal mandate to promote high employment and price stability, the ECB can only focus on price stability. This is unjustifiable and a huge disadvantage compared to the US. If you want to be successful in the long term, you have to fundamentally question the mandate of the ECB.
Liberals tend to believe that the economy takes care of itself. This has always been wrong. Today, with enormous national and international challenges, this sentence is less true than ever. Nevertheless, the spirit of precisely this idea permeates the exploratory paper. The focus on the small details and the complete absence of a macroeconomic diagnosis and the corresponding therapy has been adopted directly from the old coalition. The fate of the new coalition will be decided here.