Olaf Scholz

Rede bei der Investorenkonferenz der Deutschen Bank

Dear ladies and gentlemen,

“Cool Germany” was the title of a cover story by The Economist in mid-April on the state of our country. The German economic situation is indeed very good: Growth is on a robust path, with real GDP expected to increase by 2.3 % this year and 2.1 % in 2019.

Several years of robust growth have translated into a very well performing labour market. Unemployment is at a historic low since German reunification, with the ILO unemployment rate now at 3.5 %. Employment has reached record levels and is expected to increase further to a total of almost 45 million persons. The new federal government is striving for full employment, and we are well on the way to achieving that.

High employment and increasing wages are important ingredients for ensuring that domestic demand remains the most important driver of growth. Low interest rates are supporting the acceleration of private consumer spending and residential construction. Investment and external trade are also contributing to growth.

How did we get here in the wake of the global financial and economic crisis? It was a combination of different factors:

1. We had profound structural reforms in the early 2000s, with a focus on improving work incentives and lowering the financial burden for employers.

2. During the crisis, the federal government reacted fast and focused on cushioning the impact of the crisis on the population and the economy. I was Labour Minister at the time, and I recall how effective “Kurzarbeitergeld” – short-time work allowance – was. This extraordinary measure helped to prevent mass dismissals in Germany. This was not only beneficial for workers; it also ensured that companies had a trained and experienced workforce at their disposal when it was needed again.

3. We paved the way out of the crisis with a clear commitment to restore solid public finances as soon as possible. This was all the more important when the euro crisis broke out and Germany resumed its role of an anchor of stability within the euro area.

Economic trends since then have proven that our approach was right. But this is not the time for envy from outside, nor for complacency from inside. German politics needs to ensure that the good economic situation lasts and that all our citizens participate in the benefits. That is the new federal government’s aspiration and commitment.

Germany is cool not only because of our mix of traditional and innovative, of small, medium and large businesses. It is also cool because people and businesses can benefit from a good environment, including our well-functioning welfare state. And the new federal government will undertake targeted measures to further improve the working and business environment as well as to support families and middle and low-income earners. I will give you two examples from areas that probably affect everyone, namely housing and education.

Let us first take a look at the German housing market. Both rents and housing prices have increased markedly over the last few years. In 2017 alone, rents in cities increased by more than 4 %, and house prices by about 8 %. Undoubtedly this is a big issue for renters who have difficulties in affording higher rents for the apartments they live in, and even more so for people searching for a new rental apartment. But this trend has been very uneven across the country, being most pronounced in around a dozen big cities. For example, real estate prices increased by about 15 % in Berlin and by about 17 % in Frankfurt last year. Over the past five years, prices in Berlin and Frankfurt even increased by 71 % and 68 %, respectively.

However, compared to major cities in other countries, living in Germany is still quite affordable. Even in Munich, the most expensive German real estate market, the prices are still far lower than in London, New York or Paris. In 2017, renting an apartment cost about 11 € per square metre in Berlin and 16 € in Munich compared with 30 € in London and 24 € in Paris. And house prices diverge even more.
We can see a certain tendency towards social clustering in German cities, but this is far less significant than what urbanist Richard Florida describes as “The New Urban Crisis” in his book of that name published last year, in relation to a number of “superstar cities” such as New York, London, Hong Kong, Los Angeles and Paris along with some leading technology and knowledge hubs. Florida warns that gentrification and inequality are increasing rapidly in these cities, so that low and middle-income earners can no longer afford to live in these cities nor even within commuting distance. In addition to all the social difficulties that come with such segregation, Florida also warns of the resulting risks to the economic growth of the whole country.

We don’t want to see situations like those in London, Paris or New York in Germany, where only the better-off can afford adequate housing in the city. Although we do not see clustering of such a scale in German cities, the new federal government is addressing the root causes with a housing initiative for more and more affordable housing. This includes promoting the construction of social housing and financial support for families who buy their own house or flat. We do not only need affordable housing somewhere. We will ensure that employees can live where they work.

My second example is the German education system, which provides free and equal access to high-quality education at all levels. The vast majority of schools and universities are in public hands. Parents gladly send their children to the local primary school together with the other kids from the neighbourhood. And even for secondary school, most pupils do not need to travel far. More than 90 % of students attend state schools that are free of charge.

No doubt, German schools can – and must –improve further. That is why, for example, we set up last year a federal programme to renovate school buildings. And we will launch an initiative to improve the digital infrastructure in primary and secondary schools across the country.

No matter where you graduate from high school in Germany, you have access to all universities. Public universities, which account for 91 % of students, do not charge general tuition fees.

Public investment in childcare has increased considerably over the past decade. Since 2013, parents of children from the age of one have been legally entitled to childcare in the vicinity of their home. And we will continue improving the quality and quantity and lower the cost of childcare, for children up to primary school age – since this is the crucial precondition for being able to choose how to combine work and family life. In particular, this will allow many women to go back to work when they want to. This is not only a question of ensuring the availability of the work force. It is first and foremost a question of equality. And of social justice.

In short, there are many areas of private life where Germany is cool. We keep improving our welfare state, which is a real locational advantage.

But Germany is not an island. Our welfare is closely linked to the welfare of our European neighbours. Our markets are interlinked in the European single market. That does not only shape our trade in goods and services. To understand the German labour market, you need to take into account the fact that it is part of the single market. More than 50 % of people migrating to Germany each year are from other European countries. And most of them are entering the German labour market.

You may not know that we have a very liberal immigration regime for highly skilled workers from outside the EU, which is known as the “Blue Card”. It is available across the EU, but Germany issues the vast majority of these cards. Applicants are university graduates, many of whom come from India, China, Russia, Turkey and Ukraine. We will further improve immigration legislation during this legislative period to better guide and manage immigration based on the needs of our economy.

Labour migration has shaped the German labour market since the 1960s. Today, people with a migrant background make up one fifth of the workforce in Germany. This is a competitive advantage for Germany, facilitating economic relations abroad.

What you see for the labour market applies to Germany as a whole, and goes far beyond economics: We are deeply integrated into the European Union. Germany’s interests are irrevocably anchored to those of the EU. That is why we want a strong Europe. In the world of 10 billion inhabitants that we will have by the middle of this century, Germany’s voice will only be heard if it is part of Europe’s 500 million voices. Being the biggest EU country with a strong, export-oriented economy in the middle of the continent, we depend on a successful European Union. And everything that we do – or which we do not do – affects our European partners. We must assume this responsibility in a wise and sensible way.

The challenges for Europe are growing larger: Armed conflicts on our doorstep and their consequences, such as huge migration flows into our countries; terrorism and questions of internal security; the rise of demagogues and nationalists, of new global powers and fundamentalists; climate change.

In the ongoing discussion on how Europe will react to those challenges, it is my clear perception that many Europeans do not think that Europe is too strong or too dominant. On the contrary: They consider Europe too weak, too fragmented. And they feel that Europe does not have answers to the fundamental challenges it faces – answers that we are expected to have.

It is my impression that, over the last few years, we have spent too much time discussing the single market and too little time talking about the great political challenges. French President Emmanuel Macron is correct in highlighting that finding a solution to these challenges is a question of European sovereignty – our sovereignty to live according to our own set of rules and preferences.

And Emmanuel Macron is also right in saying that we cannot wait. We really have to start acting. This is true for the European Union on the whole, and it is true for the Economic and Monetary Union in particular. We have to find common solutions that enjoy broad support. For example, we are not discussing anymore if we want to proceed with the banking union but rather how we want to proceed. Many steps have already been made on this way, including common banking supervision and the Single Resolution Mechanism.

And less than two weeks ago, at the Ecofin meeting, we reached a breakthrough on the banking package. This is not only a major step forward in enhancing the stability of the European banking sector and protecting European depositors and taxpayers in the event of a bank failure. It also shows a new momentum in Europe. It shows that we can find common ground, even with complicated and controversial issues such as this. I am confident that we will also move forward on non-performing loans – where the current economic environment should help us find a pragmatic approach that works for all countries. And that it will help us find a solution on the so-called common backstop for the Single Resolution Fund in the coming weeks.

There is no doubt that we need to take further action and stop engaging in endless discussions without the will to find common solutions. This is the only positive thing I take from the regrettable decision of the British people to leave the European Union: the remaining members have come closer together, and almost everyone has understood that we cannot just keep on going the way we did before.

Before I finish, I would like to say a few words about the German banking system. To me, it is clear that Germany needs a strong and diverse banking landscape. Small and medium-sized enterprises that are operating internationally – and many of them are doing so very successfully – need banking services that are as international as they are. They need partners that understand their clients’ way of doing business. They will not be able to rely on market-based financing alone.

Germany is an important financial centre. I wish the German banking system was valued abroad as much as Germany is in general, given our GDP and our economic prospects.

The Economist has identified Germany as the place to be. I have shared with you some thoughts as to why I agree – and why I am convinced we can maintain this position in the future. We can do this if we resist the temptation of complacency and if we keep on improving business conditions in Germany and Europe as well as improving the effectiveness of the welfare state. Because both together represent Germany’s locational advantages.

Thank you!


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