EThere are sentences that you don’t often hear from politicians and that are all the more remarkable when they do come up. Chancellor Olaf Scholz (SPD) said such a sentence a few days ago in a question and answer session with citizens: “What we as an economy will not be able to do in the long term is to subsidize everything that takes place in normal economic activity.” Scholz justified his Reluctance towards a state-subsidized industrial electricity price, which has many advocates not only in business but also in his party.
Scholz is right. An economy that depends on government support is not healthy, either for the national budget or for the economic well-being of the country as a whole. The only question is: why has his government so little heeded this principle?
There is no question that the past few years have been challenging. First, the corona pandemic shook companies with the recurring lockdowns. The “Bazooka”, which Scholz brought into position as finance minister against the loss of sales, fired more than 70 billion euros in grants.
After the Russian attack on Ukraine and the rise in energy prices, another aid program was launched that has no equal in Europe. Around 100 billion euros are available for price brakes on gas, district heating and electricity until April 2024. The fact that only part of it is used due to the lower market prices is a positive development. But the debate about who and what should be funded with the remaining money is already in full swing.
No shortage of new subsidy proposals
A continuation of the electricity price cap for industry, more help for property owners who are converting to heat pumps, more subsidies for setting up heat pump production in Germany: there is no shortage of proposals for new subsidies. Business association surveys showing that companies are increasingly directing their investments to North America or China are increasing the pressure on the government to spend more money. Why be stingy when the United States is also pouring out the cornucopia with its Inflation Reduction Act?
Nevertheless, it would be worthwhile, in keeping with Scholz’s inventory, to put the concept of the subsidized economy to the test. There is little objection to temporary crisis or start-up aid. But often enough it doesn’t stop there.
Analyzes by economic researchers show that the scope of subsidies has increased significantly over the years, to up to 6 percent of German economic output. There is no end in sight to this trend. Around 177 billion euros from the climate and transformation fund are planned by 2026 for projects in the interests of climate protection, from the heating transition in single-family homes to the conversion of industrial processes to hydrogen.
Doubts about the cost-benefit ratio
Whether battery cells, microelectronics or pharmaceuticals – more and more production areas are being declared worthy of support in the course of the new German economic security policy. 17 billion euros are earmarked for the construction of chip factories alone in the federal budget. It’s no wonder that Intel is playing big gambles for its planned factory in Magdeburg. The American company would like about one million euros for each new job.
It is doubtful whether costs and benefits are still in an appropriate relationship. Especially since it is by no means certain that the German industry will actually buy the chips from Magdeburg or will continue to import them from Asia as long as the geopolitical situation allows.
There would be an alternative to the general subsidization: improving the general economic conditions in Germany. An increase in the energy supply through the continued use of nuclear power and the promotion of domestic gas reserves. Faster approval processes not only for wind turbines and selected motorways. A law prohibiting the injection of CO2 allowed in Germany. Lower tax rates.
Fewer hurdles for analyzing data and using artificial intelligence. If Scholz were serious about his words, he would set the course for all of this now. He would have Finance Minister Christian Lindner (FDP) on his side. However, another scenario is more likely because it is simpler: that the slightly improved economic outlook and the expected higher tax revenues will be used to distribute even more money.
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