Germany's spending gamble | FT Film

Produced, directed and edited by Daniel Garrahan. Filmed by Petros Gioumpasis. Graphics by Russell Birkett. Assistant researcher-producers: Alexander Vladkov and Silke Richter You can enable subtitles (captions) in the video player Austerity was the truth, the belief, for many years. Germany has the wrong business model. The infrastructure of the country is crumbling. Bits and pieces from the roof started falling down. And it was deemed unsafe for the kids to learn here. So many schools need to be renovated Every day the trains are delayed. And when I make it on time, I won the lotto. It's not just shame. It's just like it's annoying. And you want to have a country that works. The debt brake reform is a very seismic shift. 500bn euros to modernise the country's ageing infrastructure. There are no debt brake constraints on defence at all anymore. This push into defence, some economists see that as a big opportunity for carmakers. Making Germany's economy strong in the way that they are now imagining, making Germany's defence strong in the way that they are now planning, is a necessary condition, not just for the revitalisation of Germany, but for the revitalisation of Europe. Merz doesn't have a choice. He has to succeed. Friedrich Merz, the leader of the Christian Democrats and now the chancellor, created an ad hoc fund of 500bn euros over 12 years to modernise and renovate the country's ageing infrastructure - roads, hospitals, schools. The second serious change is that government has now the legal leeway to spend as much as it wants on defence. And there are no debt brake constraints on defence at all anymore. The basic idea is to invest more, to launch more public investment, because the public investment at this point in Germany is undersupply. And that's why the government decided to change the constitution. The hope is that with the relaxation of the debt brake, Germany will be able to launch more infrastructure spending, and therefore, stimulate the economy. It's a big gamble in the sense that it's a massive amount of money. To try and understand what the debt brake is, one has to go back into the ideology of postwar Germany. Economic policies were designed to achieve stability, which is a thing that they didn't have in the interwar period, and in their view, led to Hitler. This explains the monetary stability fetish, creation of the Bundesbank as an independent central bank. But they also are very concerned that bad fiscal policy, excessive debts, and deficits will also destabilise the economy and possibly lead to inflation. The debt brake was established in 2009. We're in the middle of the financial crisis. Germany has to spend a lot of money to counter the crisis. They want to finally put a lid on debt and say, now we're, for once, going to take on lots of debt. But we're never going to do it again. So we put this rule into the constitution. The debt brake capped borrowing to 0.35 per cent of GDP every year. The federal states had no ability to take on any debt. Everything got back into this very conservative mindset of absolute fiscal and monetary stability. Merz, in quite an audacious step, decided to change the constitution, using the old parliament between the election and the formation of the new one. There was a kind of a time window of several weeks. And they rushed the change of the constitution through. In Germany, you need a two-thirds majority to change the constitution. And we needed to reform our debt brake. We saw the difficulties our country is in with an almost rotten infrastructure. And we wanted to be part of solving that problem and making it possible to pass that bill. Germany has woken up to the fact that it has significant defence obligations and burdens, because Russia is clearly seen as a threat. And the United States is no longer seen as a reliable ally. The infrastructure of the country is crumbling. Germany has the wrong business model. It is over-reliant on exports. At a time when globalisation is falling apart, nationalism is on the rise. Protectionism is on the rise. And its core industries, the heavy manufacturing industries, are under attack by Chinese manufacturers. Germany bounced back after the pandemic. But since this bouncing back in '22, the economy has basically been flatlining. The economy is struggling with decarbonisation, making it harder to have electricity at a competitive cost. And now, the global trade wars are really impacting the German economy, and especially car manufacturing is just not what it was before. And that is really the big driver for a lot of things. Germany outsourced its energy supply to Russia, consumption to China, and security to the US. And all of these three factors have now come under threat. The German model has failed or has to be reworked. After the fall of the Berlin Wall, German defence policy completely changed focus. For many years, the political idea was, oh, we don't need the force that is able to defend our territory. We only need a force which kind of does overseas operations, like in Afghanistan. Conscription was abolished. The army was really shrunken quite significantly. Germany has really relied on the US and Nato for its defence, its security and didn't really think of its army as a real army because of its fraught past, history, its central role in the second world war, the Nazi regime. It really took the Russian and full-scale invasion of Ukraine in 2022 to change that political perspective. It's an honour to have you. Thank you. As you know, the chancellor just won a great election, a very, very strong election. The loss of the US as the pillar of European security demands that Europe responds. Otherwise, it fragments. And then for Germany, that's a catastrophe. And whenever you think about the history of Germany, you have to look at the map. Why did they get involved in all these terrible wars? Because they're right in the middle. They're surrounded by neighbours. For the first time in their history, their neighbours are all friendly. They're bound to them by the EU treaty. They have to protect this because it's about protecting themselves. And they're the biggest economy. So they have to take these actions. They have to be a leader. That requires a lot of spending because Germany didn't have any helicopters that could fly and any jets that could fly, or very few of them. Some of the bridges could not sustain tanks. Infrastructure needs to be modernised to sustain this defence ramp-up. The immediate positive spillover on economic growth from simple defence investment is relatively limited. This push into defence, some economists see that as a big opportunity for carmakers, which are facing this structural shift. Lots of suppliers for the car industry can actually also work for the defence industry. Will it be enough to bring about the economic miracle? I'm not convinced. Defence spending is not always investment. And it goes often into consumption or into salaries. So there's a balance to be struck between investment purposes of defence that stimulates the economy and the running of the army. If defence spending doesn't occur, Germany will remain weak. The Americans will look at this, and they will say, you're not committing anything to Nato. We're going to really wash our hands of you and of all your allies, and that means of Nato. And that will be terrible for Germany. The Russians will look at them and say Europe is weak. It's not prepared to defend itself. It's not prepared to build up its economy. We can poke more and more here. Potentially, this could even lead to a situation in which the EU starts breaking up because countries will start saying, well, actually, it would make better sense for us to do a deal with Russia. They have to find a way of building up the defence capacity of the country, so they have to spend money. There's no alternative. The Merkel years of government were years of underinvestment in our infrastructure. That has led to our substance of our country deteriorating year by year. Germany's train system is very dysfunctional. Trains do not run on time, most of the time. And it's really due to a lack of investment, also a lack of personnel. Demand for trains and for train travel has risen due to climate change considerations and people deliberately not wanting to use domestic flights. If it's so unreliable, people go back to driving or using the plane. So people are very frustrated about that, obviously. My name is Laura. And I'm working in Frankfurt, so I bring my daughter every day here to school. And then I have to take the train and go all the way to Frankfurt to my job. It's not easy when I'm coming back and I have to pick her up. Every day, actually, the trains are delayed. And I always need a back-up plan, so in case I don't make it. I have to call people and say, please, can you pick her up? When I make it on time, I won the lotto. We start making fun about it. When you talk about somebody that is not on time or is always late, you say it's like the German train. We do feel what Laura is going through. This is something we are facing for the last years. It's not only that our infrastructure is too old, but also too congested. Sometimes the trains just stop, so it can be 20 minutes or 30 minutes. It's frustrating. So the good news for Laura is that we have been able to stop the ageing process of our infrastructure that caused so much problems with the delay, with unpunctuality of our trains. We invested a record number of 19bn last year, in 2024, into the renovation of our infrastructure. If we continue doing so, it will be better. It won't be better overnight, but it will be better in a couple of years. So now, it's 2:35, and I have to leave work a little bit earlier, because I just saw in the app that the train that I would like to take at 3:19, it's cancelled. I will be later than I should be at home and pick up my daughter from school. It's every day the same thing. This lacking infrastructure goes against the German identity of efficiency, of punctuality. Look, if a train goes from Germany to Switzerland, the Swiss train system, they usually stop the German train at the border because the German train arrives late. And they don't let the German trains in anymore, spoiling the Swiss punctuality. So this tells a lot about the problem. We have one-third of trains that is delayed in the long-distance network. It means that still two-thirds are punctual, which is not that bad, but clearly not sufficient and not what the public expects from the railways. Punctuality statistics are pretty bad and have got worse in recent years. That's despite the fact that only trains that run more than six minutes late are actually counted as late. And all those many trains which get cancelled don't enter these numbers at all. There is a shortage of train drivers. There is a shortage of people who are manning the signal boxes. There is a shortage of the people who have to approve construction works. And right now, we have construction work that has completed. And the railway lane cannot be reopened because those scarce people are not available. And Deutsche Bahn forgot for years to train them. And all these management failures are now adding to the other problems that the infrastructure has. The renovation of infrastructure in Germany is not going to happen overnight. There are a lot of bureaucratic hurdles. And there's also perhaps a question of capacity. There are no, to my mind, financial or economic constraints on what they can do. But I'm sure there are constraints on their actual ability to spend this well. Germany actually couldn't do this investment programme tomorrow because these industries have been so shrunken for so long. Money is not everything. So there are loads of problems, including labour shortage, that not that many construction companies that could be mobilised. And so prices could go up. Schools - very basic infrastructure, very needed, are crumbling. They've had to put up support pillars to hold up the structure of this building. It was deemed unsafe for the kids to learn here. Nothing was done until it got so dramatic that bits and pieces from the roof started falling down. Just in Frankfurt, the situation is there are about 60 schools that are falling apart and really need work. And then the situation here obviously goes into the rest of Germany. Germany is a very decentralised country. The problem then is if the federal level cannot give directly the money to the local municipalities, it always has to go via the states. And the states are sticky, so not all the money that you give to them necessarily ends up in the local municipalities. The German Ministry of Finance is going to look at how other ministries are going to fund and use this money, and will make sure that it's not used for consumptive purposes. We'll make sure that it goes along with structural reforms. Likewise, for the money that goes to the municipalities and to the Bundesländer, the regions, they come with conditionality attached. A lot of the roads and bridges were built in the '60s and '70s and now showing cracks, and they're becoming very old. One example is this bridge near Dresden. The bridge literally collapsed. It's still not renovated. It collapsed in 2024. It was a very big shock to the system. It's also quite humiliating. The perception of Germany outside Germany is that it's this great engineering country. The problem with Germany is that it's an ageing population, and they have increasing social costs. There are other areas of the economy where we would just have a lot of potential for growth, like integrating more women into the labour force, enabling them to work more. Secondly, migration - we mainly talk about it in negative terms at the moment. But actually, it's hugely helpful for an ageing population because you get more younger people in the workforce. And we haven't really managed to capitalise on these two factors like some other countries have. Germany has high labour costs, and it will always have them, even if it's efficient, because the standard of social security that we have in this country is high. We have an old population that costs a lot of money. So you really need people to be productive. And how do you get them to be productive? By having a good education. With migration, it can really boost the labour force. And if you don't teach people German and you don't give them the necessary qualifications, they will all end up in the benefit system. And I think that's really the big risk. There must be a risk that inflation will pick up. Germans really, really, really don't like inflation. I suspect there will be some political problems associated with this. It's not a free lunch. If the money is not spent wisely, Alternative for Germany, the far-right party, which is currently the second-largest force in parliament, will benefit from it. There's a risk of a narrative emerging, fueled by the AfD, that this is 500bn euros waste if the German government cannot show that over the years, the money is actually improving infrastructure and increasing public investment. So that's why it is so important that the money is spent only for investment purposes. If you're paying taxes, and you still don't have a train that runs, and if you see that the school of your daughter is trash, you will no longer really believe in that state. And often state and democracy is equaled. So that investment in our public goods and our infrastructure is an investment in democracy. The really big danger now is people see a lot of money being spent on the military and on support for Ukraine. And the two, in a way, go a little bit together. And at the same time that they don't see the spending at the local level in their schools, in their communities, and all the things that make life easier. And that makes people really, really angry. If people do feel the difference and do have trains that run again, schools that look nice, they might again then really believe in democracy, and in turn lower the votes for AfD. Austerity was the truth, the belief, for many years of the conservative and neoliberal politicians that were governing this country. And yes, I've been ashamed of that. It's not just shame. It's just it's annoying. And you want to have a country that works. New 500bn euros are supposed to give Germany back what it's supposed to be, a punctual and efficient government and state. It will, however, take a lot of time until these 500bn euros are going to be spent. It's a gamble in the sense that it might not work. But then life is a gamble. Germany remains a big, rich country. They've made some fairly big mistakes. Their fiscal policy has been far too tight for a very long time. They have been too dependent on foreign demand. China is now overwhelmingly the biggest manufacturing country in the world, a gigantic exporter, a direct threat to Germany, of course it is. If this gamble wouldn't take place, then the prospect would be really bleak. It will surely improve prospects for GDP growth and for the wider economy. There is an opportunity for Germany to take a lead in Europe and going into this investment spending to revive the European economy, which largely depends on Germany. But it needs a bit more. I think you need more than infrastructure spending. It's not just infrastructure that has really suffered from austerity. It's also public services. I'm talking about education, childcare, all these things that are really needed to properly boost the labour market and growth. Making Europe strong is the vital national priority of Germany. Making Germany's economy strong in the way that they are now imagining, making Germany's defence strong in the way that they are now planning is a necessary condition, not just for the revitalisation of Germany, but for the revitalisation of Europe. Not doing this would be a catastrophe. I believe that the Germans are serious enough and competent enough - they always have been - to get this to work because they have to. The backdrop is so challenging... And in a little while I'll be signing four... ...an adversarial US president, increasing geopolitical tensions. Merz doesn't have a choice. He has to succeed.