Opinion Piece by ZEW President Achim Wambach

ZEW President Achim Wambach on the economic challenges facing the coming government.

After Angela Merkel’s 16-year term as chancellor, Germany is doing very well economically, at least if we look at GDP or the unemployment rate. However, this is only half the truth. The need for re-form is enormous. The Economist even wrote about “The mess Merkel leaves behind” and de-nounced the complacency of German politics. Climate change and digitalisation are leading to mas-sive upheavals for which Germany is not sufficiently prepared. The coming government has a lot to do in this regard. With a new composition of political forces, however, it has a unique opportunity to resolve frictions and revitalise markets to make space for innovation and enable the adjustments necessary for change. Let me give you three examples:

A central task for the new government will be to create a modern and low-emission mobility. One of the problems is that the German railway system is in firm hands. In long-distance transport, for example, one company – Deutsche Bahn AG – has a market share of over 95 per cent. Unsurpris-ingly, the planned ‘Deutschlandtakt’, a new regular-interval national timetable, is sometimes even referred to as Deutsche Bahn’s new interval. To ensure that this does not remain the case and that more competition enters this market, a separation of the rail infrastructure from the rest of the DB Group is an important step. This would prevent distortions of competition, especially those caused by discrimination on the part of the network operator. The timing is favourable: the German liberal party FDP advocates this step in its current election manifesto, and so did the Greens in their elec-tion manifesto in the 2017 Bundestag elections.

Along with this separation, the federal government should divest itself of its shares in the transport division of Deutsche Bahn AG as well as in other companies that are essential for structural change. In addition to Deutsche Bahn, in which the federal government holds a 100 per cent stake, these are in particular Deutsche Telekom and Deutsche Post, 31.9 per cent and 20.5 per cent of which are owned by the public sector, respectively. This co-ownership repeatedly provokes conflicts of inter-est and distortions of competition. Who would voluntarily enter into competition in a regulated market where the rule-setter is also a stakeholder? It is therefore consistent for the FDP to speak out in favour of this sale in its election manifesto. The Greens are more sceptical, at least with re-gard to companies that are essential for public services. In a market with functioning competition, however, there is no need for active participation by the public sector. Moreover, the sale can also serve to bridge financing bottlenecks.

The electricity market is at the centre of the energy transition. However, there is a lack of price sig-nals that create incentives for the necessary massive expansion of renewable energies and the in-troduction of storage technologies. Since grid expansion has been slow for a long time, an electrici-ty grid without bottlenecks is illusory – and it would not be efficient either. This makes the question of where the electricity suppliers build their wind and solar power plants and where the companies that purchase this electricity settle all the more important. In order to be able to make such deci-sions taking into account the bottlenecks in the electricity grid, so-called nodal prices, as they have existed in the USA for more than 20 years, are also conceivable in Germany. Such a system allows for regional price differences at the electricity grid nodes. Prices are lower where there is a lot of electricity and higher where there is little electricity but high demand. Both the Greens and the FDP have spoken out in favour of regional prices. In their parliamentary group resolution of April 2021, the Greens advocate “preparing for the introduction of price zones or nodal prices in the future”. In a question to the federal government in June this year, the FDP presented a switch to a nodal price system as a suitable solution for grid bottlenecks.

As opposition parties, the Greens and FDP have often pointed out where markets are inhibited and business dynamics are thwarted. Now is the time to translate these considerations into political action.