Germany isn’t the sick man of Europe, but it could be – DIW president

BERLIN (Reuters) – Germany is not the sick man of Europe yet but it could become so if it does not make the structural changes required to modernise its economy, said Marcel Fratzscher on Friday, president of the German economic institute DIW Berlin.

Fratzscher spoke about a “huge investment gap”, which he said was reflected in a lack of public infrastructure, particularly energy and digital infrastructure.

The necessary transformation towards digitalisation, sustainability and the green transition is ultimately being massively slowed down by the interventionist approach of the government, the economist said.

“Germany could become the sick man of Europe if it sleeps through this transformation,” he told Reuters. “I am concerned that we are trying to cement old structures.”

The investment gap is expected to worsen after a German court ruling wiped billions from the federal budget, he said.

“We don’t have a budget crisis, nor do we have a debt problem. We have a political crisis,” Fratzscher said.

Fratzscher, an experienced ECB economist, leads the independent DIW Berlin, which together with other economic institutes, prepares the economic forecasts guiding the German government forecasts.

The court ruling has increased tensions in Chancellor Olaf Scholz’s already fractious government, which has seen support slump as it tackles a series of crises and the economy teeters on the brink of recession.

Although the Greens and Scholz’s SPD want additional spending, the Free Democrats (FDP), which heads the finance ministry, reject additional debt and higher taxes.

There are two camps that are completely incompatible with each other, the economist said. For him, the biggest risk is the uncertainty caused by the budget crisis, which leads companies domestic and international to invest less in Germany.

For the economist, the best way out of the crisis would be to suspend the debt brake for a fifth consecutive year, an option rejected by German Finance Minister Christian Lindner.

The debt brake, enshrined in the German constitution, restricts the public deficit to 0.35% of gross domestic product.

Fratzscher said a reform of the debt brake was urgently needed.

All parties are trying to find ways of circumventing the debt brake, he said. “A rule that has so little real acceptance has lost its value.”

(Reporting by Maria Martinez, Reinhard Becker and Rene Wagner; Editing by Alison Williams)