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German firms hope for investment boost from new coalition

Michelle Martin and Sarah Marsh
Wednesday, 23 Oct 2013 | 11:05 AM ET

* German infrastructure fraying due to lack of investment

* Merkel and SPD likely to agree on higher investment spending

* Sticking point for coalition talks is how to fund it

BERLIN, Oct 23 (Reuters) - It used to take just one night for Burkhard Dahmen to send his firm's giant steel rollers to port for export. Now his trucks need eight days to navigate a tortuous route of small roads and canals because motorways cannot bear the load.

A chronic lack of investment in German infrastructure has forced bridges to close and led to restrictions on the use of the country's autobahns, compelling firms like Dahmen's SMS Siemag to make costly diversions. His transport costs have risen fivefold in just five years.

"There are now long stretches of motorway we can't use, and that makes it very difficult for us to transport our parts," said Dahmen, the Duesseldorf-based firm's chief executive.

Obsessed with balancing its budget, Germany spent less on infrastructure over the past decade than was needed to keep it in working order, let alone upgrade it.

Government spending on this fell to 1.5 percent of gross domestic product (GDP) from 2 percent in 1999, and is well below the European Union average of 2.5 percent, according to the DIW economic institute.

Other areas have also suffered. Germany spends less on education than than the average of industrialised countries, data from the Paris-based Organisation for Economic Cooperation and Development (OECD) shows.

Such scrimping means Europe's biggest economy risks losing its competitive edge, companies and economists warn. The tendency to save rather than spend has also contributed to current account imbalances in the euro zone that experts say must be addressed if the bloc is to fully recover from its four-year debt crisis.

Now, as Chancellor Angela Merkel's conservatives begin coalition talks with the centre-left Social Democrats (SPD), there is hope that this is about to change, as both parties appear to agree on the need for more investment.

"It's very likely a 'grand coalition' will increase spending on infrastructure and education," said Sebastian Dullien at the European Council on Foreign Relations. "If it fails to act, it puts the future of the German economy in jeopardy."

The conservatives, who emerged as by far the largest party in September's vote but still need a coalition partner, promised in their campaign to spend slightly more on infrastructure and education.

The SPD made a more ambitious pledge to boost total investment spending across the public and private sectors by 80 billion euros ($110 billion) a year - more than Slovakia's annual output.

The party, which is split on whether to join Merkel again after seeing its support crumble the last time it went into government as her junior partner, made higher investment one of its key stipulations last weekend.

Germany's overall investment rate has shrunk to around 17 percent of GDP from some 20 percent in 1999. Closing that gap would push potential growth up 0.6 percentage points to 1.6 percent by 2017, according to the DIW.

But DIW chief Marcel Fratzscher says he is "not optimistic" the new government will go that far as there is not enough pressure. The German economy continues to outperform its euro zone neighbours', at least for the time being.

STICKING POINT

How to fund higher spending is the sticking point. The SPD campaigned for tax hikes on the wealthy, but Merkel has rejected this outright.

Senior Merkel allies have signalled that Berlin could tap projected budget surpluses from 2015 that the chancellor had pledged to use to pay down debt. More controversial would be an increase in borrowing, a step Merkel has opposed until now.

Berlin may also take steps to improve lacklustre private sector investment levels through tax incentives, public-private partnerships and deregulation in the service sector.

A more precise roadmap for its ambitious switch to renewables from nuclear could provide companies the security they need to invest in the energy grid, economists say.

However they raise the money, it will be quickly spent. Though Germany still ranks among the world's top 10 countries for infrastructure, firms complain it is losing ground.

A fifth of motorways need renovating, 15 percent of bridges are deemed "inadequate", and a quarter of waterway locks are at least 100 years old, some dating to the 1888-1918 reign of Kaiser Wilhelm II, the last German emperor.

Exporters like SMS Siemag, which are traditionally Germany's growth engine, rely on the road, rail and waterway network to operate their supply chains and get their goods abroad.

"Every day our streets, rails and waterways depreciate by 13 million euros," said Kurt Bodewig, head of a transport commission and a former transport minister.

A slight increase in investment spending is unlikely to do much to reduce European imbalances.

"Germany having somewhat stronger demand does help the euro zone, but these measures aren't going to be a very big boost. They're very modest," said Berenberg chief economist Holger Schmieding.

To put it in context, he said more infrastructure investment in Germany would give Spanish GDP less than a 0.1 percent boost via exports.

It could make a much bigger difference to German companies.

"It would ensure our final delivery in time and strengthen our competitiveness," said Dahmen.