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Red tape and labour issues weigh on the German fiscal bonanza

Red tape and labour issues weigh on the German fiscal bonanza

Germany has given the green light to massive borrowing, which is expected to boost the anaemic German economy and the ailing corporate sector in the near term.

The negative ripple effect will be delayed by the chronic labour shortages, and the numerous bureaucratic processes required to launch spending plans or tendering procedures. This is true for both companies and for an economy which has been contracting for two consecutive years.

German business leaders claim that the process of allocating large sums of money to public agencies will take time.

The fiscal plan includes plans to remove the borrowing limits for defence investments and a special infrastructure fund of 500 billion euros ($545billion).

Marc Tenbieg is the head of the DMB Association, which represents thousands of small and medium-sized businesses that are the backbone of the German economy. He says red tape, complicated European tendering requirements, and personnel bottlenecks have often prevented past funding from being used effectively.

He said that simply pumping more money into infrastructure will not suffice.

The financial markets welcomed the historic reforms and sent Germany's blue chip DAX 30 index to record highs in this week, with the construction sector expected to benefit most.

Berlin's plans also fueled a rally in euro and euro zone yields. The German 10-year yield reached 2,938% last weekend, its highest level since October 2023.

But economists claim that the fiscal expansion approved by the upper chamber of parliament on Friday will not be a quick fix to the economy in this year.

The more extensive effects will be seen in 2026 and 2027 when state actors start to award contracts and the companies expand their capacity, said Cyrus de la Rubia. Chief economist at Hamburg Commercial Bank.

The German DIW Economic Institute says that the infrastructure fund could increase economic output by more than 2 percentage points per year on average over the next ten years. The deal to ramp up defence and infrastructure expenditures is expected to boost the economy by 2.1% instead of just 1.1%.

It has recently revised its economic forecast for this year. After forecasting 0.2% growth in December, it now says that the economy will stagnate because of weak private spending.

Business executives in the heartland of manufacturing, who are facing high energy and labour costs and are cutting jobs, have not yet joined the celebration.

Ulrich Flatken is the head of Mecanindus Vogelsang which manufactures cylindrical fasteners and other industrial products for carmakers. The company employs 450 people.

He said that he would like to see if "truly tangible structural reforms" are included in a coalition agreement between the political parties after last month's elections.

CAPACITY CONSTRAINTS

Germany's economy has lagged behind other European economies in the last two years. Jesko von Stechow said that a combination of EU and national regulation "virtually choked the economy." He called on Germany's new leaders to reduce bureaucracy.

Spending plans have revived some of Germany's most venerable and downtrodden firms - ThyssenKrupp doubled its value in just one month.

While its European Steel business, the continent’s second largest steelmaker, welcomed this week’s stimulus, its head has said that he will stick to plans to reduce capacity and jobs.

Siemens announced on Tuesday plans to cut 5,600 positions at its Digital Industries division.

By 2035, 340,000 STEM (Science, Technology, Engineering, Mathematic) academics are expected to exit the workforce, causing a shortage of 130,000 engineering and IT professionals.

Adrian Willig of the Association of German Engineers VDI said, "We need to increase our engineering capacity in order to implement the massive investment package into concrete projects which will take years."

Others even warn that the economy could overheat if these production capacities are not expanded.

Robert Grundke is the senior economist for Organization for Economic Cooperation and Development. (Reporting and editing by Mark John and Josephine Mason; additional reporting and editing by Vera Eckert)

(source: Reuters)