RaboResearch - Economic Research

German fiscal stimulus: Will politicians heed the call?


  • Germany has become increasingly dependent on exports for its economic performance, supported by an initially strong competitive position and robust demand for capital goods from Asia
  • The negative consequences of this export-led model are now starting to materialize
  • We believe there is a colossal need for government and private sector investment in infrastructure, climate-related innovation and Germany’s poor digital infrastructure
  • Germany is also feeling the impact of an ageing population more than other eurozone member states
  • We calculate that the negative contribution of labor to future economic growth could be as high as -0.8ppt annually
  • We argue that adopting an investment fund focused on R&D, capital formation and education could lead to significantly higher TFP growth
  • We look at two investment scenarios (€150bn and €450bn) that could lift the country’s potential growth rate
  • While the government is unlikely to abandon its strict budgetary rules for the €450bn package, we believe a €150bn investment package is possible under the constitution - although it will still take some political will to implement it

Foundations of Germany’s export-driven growth are crumbling

A long period of economic growth in Germany seems to be coming to an end. The problems that started in the manufacturing sector as early as last year have only deepened and are now starting to spill over to other sectors as well (Figure 1).

To understand the source of these difficulties, it’s important to note that growth in the German economy has become increasingly export-driven over the last two decades. In 2000, the export-to-GDP ratio was around 27%; by 2019 it has almost doubled. And where net exports as a percent of GDP were still relatively modest around 2000, this trade surplus has steadily increased, reaching around 7% in 2019 (Figure 2).

Figure 1: Not only manufacturing PMIs are doing poorly
Figure 1: Not only manufacturing PMIs are doing poorlySource: Markit IHS
Figure 2: (Net) exports have become more important
Figure 2: (Net) exports have become more importantSource: Statistisches Bundesamt

Two important drivers supported this export boom. Firstly, labor costs in Germany declined relative to its competitors between 1995 and 2012 (Dustmann & Fitzenberger, 2014). This led to a strong competitive position for the German export sector.

Secondly, the ongoing rise of China (and other Asian economies) over the past two decades has significantly raised the demand for German capital goods (Figure 2), a sector renowned for its quality. This trend not only raised the dependence of Germany’s economy on its current account, it also increased its dependence on China.

This party could soon be over however. First of all, Germany’s competitiveness is under threat. In recent years, Germany’s European competitors have started to catch up thanks to structural reforms. The World Bank’s ‘ease of doing business index’ gap between Germany and its neighboring countries is closing and real wages are starting to catch up with productivity[1] (Figure 3 and Figure 4).

Figure 3: Relative ease of doing business of Germany declining
Figure 3: Relative ease of doing business of Germany decliningSource: World Bank
Figure 4: Labor costs are rising faster than productivity
Figure 4: Labor costs are rising faster than productivitySource: Statistisches Bundesamt

German exports are also feeling the impacts of the economic slowdown in China, aggravated by the US-China trade war, the Brexit saga and the overall slowing of the world economy. Uncertainty is an investment-killer and capital goods are relatively vulnerable, in part because of the high capital-goods intensity in world trade. Given that these geopolitical factors are part of a broader problem, these issues will continue to weigh on Germany’s growth prospects, we argue.

Still plenty of sectors with room for improvement

Now that the downside risks of Germany’s export-model are materializing, economists are calling for a rethink of the German economy and how to improve its long-term growth prospects. In recent years there has been little pressure for large-scale investments as the economic tide was relatively favorable. But the economy has been starved of public investment, partly due to a strong emphasis on fiscal rectitude over the past decade. Many economists argue that investment now needs to catch up in order to boost productivity and make the economy future-proof. We look at this more closely below, focusing on physical and digital infrastructure and climate.

Infrastructure & construction

Figure 5: Gross capital formation as % of GDP has decreased
Figure 5: Gross capital formation as % of GDP has decreasedSource: Macrobond

Germany’s infrastructure is outdated and in dire need of an overhaul. In the past 30 years there has been a steady decline of government investments in infrastructure as % of GDP (Figure 5). This policy has translated into some bridges being closed for trucks because carrying capacity has deteriorated.

Research shows (Kreditanstalt für Wiederaufbau, 2019) that there is an investment gap of €138bn just on the municipal level. This figure is composed of, amongst others, €43bn for schools, €36bn for roads and €14bn for administration buildings. This research also stipulates that political willpower it not always the issue: around a third of projects cannot be realized as planned due to capacity constraints.

Investments in infrastructure create jobs in the short term (provided there is ample capacity) but such investments are also beneficial for competitiveness in the long term since infrastructure reduces transportation costs and improves accessibility to core business activities for peripheral areas.


On 20 September 2019 the German government announced its much-anticipated climate package. The main focus is to reform the transport- and automotive sector. The package aims to increase the number of electric cars from 80,000 now to 7-10 million in 2030 by implementing a number of policies, including subsidies. The costs of this plan, estimated at €54bn, will be financed by taxing CO2 emissions through certificates.

CO2 emission taxes will start at €10 per ton slowly rising to €35 per ton by 2025. Critics are claiming that in order for both the carrot and the stick to be effective, this price needs to be set at a minimum €40. They argue that a lower price would not lead to significant incentives to innovate.

We argue that more structural investments could be made by the German government by prioritizing fundamental research on sustainable technologies. This way, innovation from both the public- and the private sector would increase.


Figure 6: Germany is just above EU average in digital readiness
Figure 6: Germany is just above EU average in digital readinessSource: European Commission - DESI

Germany is notorious for its archaic digital infrastructure. In the latest European Commission survey (2019), Germany ranks just above the EU average for digital readiness (Figure 6). For the largest economy and one of the wealthiest and most developed countries in the eurozone, and indeed in the world, that is a lamentable score.

Artificial intelligence (A.I.), dubbed by many as the next big disruptive force, is promising to raise productivity by automating many of the daily tasks people carry out. An example is self-driving cars and trucks. Literature (Accenture, 2016) shows that there is ample potential of A.I. to raise growth of GDP and Total Factor Productivity (TFP).

Recently, we argued [2] that the appliance of A.I. is largely dependent on a firm’s capacity to apply big data. In turn, applying big data is largely dependent on the underlying digital infrastructure. This is precisely the bottleneck for Germany. High-speed internet is not widely available. Fiber connections comprised only 3% of the total internet connections in 2018. By comparison, for South Korea this is 80% and the OECD average is 26%.

If Germany wants to be ready for the upcoming A.I. revolution it should ensure that the digital infrastructure can support this digital innovation.

Boosting growth with the right investments

In order to quantify the impact of an investment agenda we use an adjusted TFP model that we developed last year. Although it is hard to capture all of the investments mentioned earlier on such a granular level, by looking at TFP we can quantify the impact of investment on a less granular level, such as R&D and capital formation.

We construct a base scenario and two alternative scenarios[3]. In these alternative scenarios we assume the implementation of an investment package of respectively €150bn and €450bn[4]. Since spending on investment is prone to diminishing returns we avoid putting all our eggs in one basket and divide the investments over different sectors. Table 1 contains the division of investments for both scenarios.

Table 1: Investment scenario's
Table 1: Investment scenario'sSource: Rabobank
Figure 7: Base case scenario for TFP-, labor- and capital contribution to GDP
Figure 7: Base case scenario for TFP-, labor- and capital contribution to GDPSource: Rabobank calculations

There is one other issue that should be kept in mind. Demographics are not in Germany’s favor (see Figure 7 for the base case scenario). Several well regarded sources forecast a significant reduction in the working age population, with the fall by as much as 4 to 6 million people by 2035. This reduction is caused by an exodus from the workforce of the baby-boom generation starting around 2025. This results in a significant downward pressure on future GDP growth: we calculate that this effect could be as high as -0.8% on an annual basis.

With the downward pressure of labor contribution, cumulative GDP growth is 9.8% for the period 2019-2030 (amounting to a mere 0.8% annually). This further reinforces the case for additional investment, either in capital goods and infrastructure or in immaterial factors that positively influence TFP growth, such as education and knowledge development, in order to sustain a healthy level of growth in the future.

Figure 8: TFP-, labor- and Capital contribution to GDP for scenario 1
Figure 8: TFP-, labor- and Capital contribution to GDP for scenario 1Source: Rabobank calculations
Figure 8: TFP-, labor- and Capital contribution to GDP for scenario 2
Figure 8: TFP-, labor- and Capital contribution to GDP for scenario 2Source: Rabobank calculations

After running our TFP model and calculating the impact of additional investment for both scenarios, we find that GDP growth is significantly higher for the period 2019-2030 compared to the base case for both alternative scenarios (Figure 8). The extra investments result in respectively 5.5%- and 10.0% additional real GDP growth (so roughly 0.5% and 1% additional growth each year).

In order to determine whether these are economically sensible investments, we determine the return for each investment package by comparing the nominal GDP growth with the investment. For the first scenario, it leads to a positive return of around 22% for the period 2019-2030. For the second scenario, it leads to a negative return of around 25% for the period 2019-2030. These numbers are adjusted for inflation.

Despite its negative real return, we do not deem the second scenario to be a bad investment, for the following reason. Because of the level of capital goods (€15,000bn), an impulse of €180bn in infrastructure (or capital goods in general) will not have a huge effect on year-on-year TFP growth. Nonetheless we argue that investment is a must, given the current state of German infrastructure and the potential positive spillover effects mentioned earlier.

Abolition of the debt-brake is very unlikely

Even though there is an obvious need for large-scale investments in Germany, as we highlight above, and its government finances certainly pass the health-test (Figure 9), it may not be so easy to find the funding. The ‘Schwarze Null’ (balanced budget policy) and ‘Schuldenbremse’ (debt brake) limit the amount that can be borrowed to fund investments.

Figure 9: Strong deficit- and debt metrics for Germany
Figure 9: Strong deficit- and debt metrics for GermanySource: DG ECFIN AMECO

The balanced-budget policy states that the federal government budget should be balanced. It should be positive but close to zero. Crucially, this balanced-budget policy is a commitment rather than an obligation but Germany has committed to it in the recent past. Moreover, the strict budget policy is popular with the electorate of CDU/CSU[5].

The debt-brake however, is enshrined in the German constitution. It states that the federal government can have a maximum structural deficit of 0.35% of GDP. Borrowing more than this threshold is only allowed in times of crisis[6].

Abolishing the balanced-budget policy should not prove too hard. The chorus of voices encouraging the government to do so has been swelling. The downside is that the amount allowed under the debt-brake is insufficient to fulfil Germany’s investment needs.

From theory to practice

Having noted these impediments, would it still be possible to invest a sizeable figure in the sectors mentioned earlier? Since the debt-brake is anchored in the constitution it will take a two-thirds majority in both the lower and upper houses (Bundestag and Bundesrat) to abolish it. Given the current level of support, we consider a complete abolition of the debt-brake unlikely. If the debt-brake were to be abolished however, it could open up the potential for sizeable investments without actually worsening the debt ratio. As long as nominal GDP keeps growing by a percentage proportionate to the increase in nominal debt, the debt ratio stays fixed[7]. With a nominal GDP growth of 2% and a debt ratio of 60% this would result in 1.2% of GDP, or equivalently, €40bn. This fiscal space roughly adds up to the €450bn package over the period 2020-2030 proposed earlier.

There are ways to bypass the debt-brake however. The German state could set up a separate investment entity and act as a back-stop to assure cheap funding from the markets. Since the debt would not be directly taken on by the state this way of financing would not interfere with the debt-brake. Similar proposals have been made to finance the climate package by minister for Economic Affairs and Energy Peter Altmaier.

Such an entity could then provide favorable loans to entities in the private sector that have an agenda to boost specific parts of the economy, the digital infrastructure for example. Although this idea does work for some investments, it does not fully cover Germany’s investment needs. Unfortunately, it is difficult to hand out loans to the private sector for the creation of public goods. After all, renovating school buildings, building roads and providing top-notch education are all government responsibilities.


The trade tensions that are adversely impacting German exports are unlikely to disappear any time soon. Moreover, the competitive edge of German companies is under threat due to rising real wages. As we argue investments are a must in order to maintain a healthy level of GDP growth, especially since public investments have been under par in recent years.

With the historically low interest rates on German debt, strong debt metrics and a strong business case for both the investment packages that we have proposed, it makes economic sense to take action. The question is, do German policy makers underwrite this as well? Abolishing the debt-brake all together is unlikely to happen since it requires a two-thirds majority in both the Bundesrat and the Bundestag. Abolition of the balanced-budget policy seems more likely in our view, as does the possibility to set up parallel budgets for investments. The German government has demonstrated creativity in finding funding before; take the recently announced climate plan that is financed through CO2 taxes.

Even though there are some political barriers to overcome, we can be reasonably confident that Germany will feel the need to significantly increase public investment and will therefore decide act on it, although, in all honesty, perhaps not on the scale that we would advise them to.


[1] Although the latter is not necessarily bad for consumption – and thus domestic growth – this consumption effect has not materialized, as is reflected in record-high household savings.

[2] Only available in Dutch

[3] A description of the model can be found in the annex.

[4] The package of €150bn is based on budgetary space under the debt-brake, i.e. a structural deficit of 0.35% of GDP for the period 2020-2030 assuming the economy will grow at trend rate. The package of €450bn has been suggested by an influential German think-thank and is roughly the amount Germany can borrow from 2020-2030 without worsening its debt ratio. See the next section for more information.

[5] CDU/CSU is chancellor Angela Merkel’s party and also the largest party in the Bundestag.

[6] A crisis is defined as either a natural disaster or an economic crisis.

[7] Of course this assumes that interest costs do not change, which is perhaps a somewhat overoptimistic view. If one takes into account the possibility that improved growth prospects lead to higher market rates (especially if this were to allow the ECB to abandon QE or even its negative rates policy), such higher market rates would also have to be factored in. However, the inherent uncertainty of this happening as well as the fact that the ECB will take a Eurozone-wide approach, suggests that the impact of higher interest costs can be discounted to a significant degree.


Accenture. (2016). Why AI is the Future of Growth.

Dustmann, C., & Fitzenberger, B. (2014). From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy.

Kreditanstalt für Wiederaufbau. (2019). KfW-Kommunalpanel.

Annex: A TFP model for Germany

We have adopted a TFP model for Germany based on a study published earlier. For a more elaborate explanation of the underlying model and factors driving TFP growth, we refer to the annex of that study. In this annex we briefly provide the reader with the variables used (Table 2) and the model fit (Table 3).

Table 2: Overview of variables and data sources
Table 2: Overview of variables and data sourcesSource: Rabobank
Table 3: Coefficients and significance
Table 3: Coefficients and significanceSource: Rabobank calculations
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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