Monday, 2 October, 2023

German economic policy has gone stark raving mad

  • The Telegraph Online
  • 31 August, 2023 12:00 AM
  • Print news

German economic policy is a clutter of contradictions and misguided shibboleths. The coalition government is offering exorbitant subsidies to profitable American and Asian semiconductor companies at a cost of €3.3m (£2.8m) per job, radically departing from Germany’s ordoliberal traditions of market primacy.

At the same time it is preparing to slash public investment in infrastructure and return to hairshirt budget cuts for its own people in the middle of a slump.

The economy went into a double-dip recession over the winter. It stagnated in the second quarter. It is probably in the first stage of a triple-dip recession this quarter.

With glorious mistiming, finance minister Christian Lindner is more concerned about the country’s debt-brake rule.

He aims to cut the budget deficit to 0.4pc by next year, citing a jump in annual debt service costs from €4bn to €40bn since 2021, which of course means deeper cuts elsewhere.

One of his solutions is to slash Germany’s “digitisation” budget by 99pc next year, despite repeated studies showing that starvation of public investment over the last 20 years has left the country with a persistent “digital gap”.

“He must call off this austerity,” says Stephan Weil, the first minister of Lower Saxony. The Bundesbank – once again in charge of the European Central Bank – wants to compound the fiscal squeeze with further monetary tightening, even as the producer price index deflates and the eurozone money supply contracts at record rates.

Congratulations to Intel, GlobalFoundries and Taiwan’s TSMC for shaking down the better part of €22bn in German state aid in the middle of this policy chaos.

They are to be paid handsomely to build chips that will be widely traded on the global market and will probably be facing a glut by 2030, given the frantic dash for chip sovereignty on both sides of the Atlantic, and given China’s ruinous outlays on semiconductor parity.

The new chips to be built in Silicon Saxony are highly advanced in one sense, down to two nanometers, but they are a further miniaturisation of an existing silicon technology nearing its limits.

They will be overtaken by the next generation of compound semiconductors, from materials such as graphene, which are infinitely faster, use far less energy and are likely to steal a march on artificial intelligence.

A chorus of critics in Germany are asking what the country is getting for the most expensive foray into industrial policy seen in post-war Europe. These prestige “fabs” will not make the routine, mid-grade chips currently imported on a mass scale for Germany’s car industry.

They fall between two stools.

The next six months will settle the question of whether inflation is the primary threat facing Germany and Europe, or whether the authorities are underestimating global deflationary forces and tightening pro-cyclically into the teeth of an enveloping downturn.

Fresh data from the ECB shows that narrow M1 money in the eurozone contracted by a record 9.2pc in July from a year earlier. Broad M3 turned negative for the first time. The full effect will hit with a delay in 2024 through complex monetary channels.