SOLID FINANCES
Giving even when it's pointless
In 2022, the German government spent 50 billion euros on industries where, allegedly, the market mechanism fails. Alas, in many cases, that argument doesn't hold water. History has shown that it is above all sectors with strong lobbyists that benefit from government money.
Text: Margaret Heckel
Illustrations: Emmanuel Polanco
SOLID FINANCES
Giving even when it's pointless
In 2022, the German government spent 50 billion euros on industries where, allegedly, the market mechanism fails. Alas, in many cases, that argument doesn't hold water. History has shown that it is above all sectors with strong lobbyists that benefit from government money.
Text: Margaret Heckel
Illustrations: Emmanuel Polanco
In December 2022 a new projection system was installed, courtesy of, among others, a subsidy programme called “Zukunftsprogramm Kino”, the brain child of Monika Grütters (CDU), former Federal Government Commissioner for Culture and the Media, who wanted to support cinemas located in small towns up to 50,000 inhabitants or showing films with high cultural value. In December 2022 a new projection system was installed, courtesy of, among others, a subsidy programme called “Zukunftsprogramm Kino”, the brain child of Monika Grütters (CDU), former Federal Government Commissioner for Culture and the Media, who wanted to support cinemas located in small towns up to 50,000 inhabitants or showing films with high cultural value.
Of course, with its 15 million euros spent last year, “Zukunftsprogramm Kino” is one of the smaller subsidies in the federal budget. According to the Subsidy Report issued by the Federal Ministry of Finance, the federal government paid out a whopping 47.2 billion euros in 2022. As the report informs us, this accounted for 1.3 percent of GDP and was the “highest level since 2009”, which was mainly a consequence of the COVID-19 pandemic.
The current Subsidy Report is a 516-page document, while the first one, issued on 21 December 1967, made do with a modest 91 pages. Expressed as a percentage of GDP, however, subsidies were roughly the same as they are today, when Franz Josef Strauß (CSU) was Federal Minister for Economic Affairs: in today's money, subsidies amounted to 3.22 billion euros in 1967, which is 1.27 percent of the roughly 252.76 billion euros in GDP Germany had back then. Even the justification for subsidies and the risks associated with them is almost identical, then and now: they are said to be an “important governmental instrument to achieve economic and social policy goals”. It was also important, however, to keep subsidies under “constant review” in order to “facilitate the political process”, the argument goes.
Both points need to be called into question – especially in hindsight. In the early years of the Federal Republic of Germany for instance, coal and agriculture were heavily subsidised, two industries that even then didn’t have a rosy future. But subsidies have always been justified by claiming companies and industries where the market mechanism failed needed to be supported. Even though history has shown far more frequently that subsidies primarily go to sectors that have strong lobbyists with easy access to influential government officials. So, the question is, what can subsidies really do? And at what cost? Are the benefits a country reaps from jobs, taxes or structural policies bigger than the expenses, the administrative support and the damage that ensues?
In theory, the four most common arguments for subsidies are as follows: they support economic development, correct for market failure, support strategic goals and regional development. On the other hand there are four key disadvantages: subsidies distort markets, create dependencies, foster inefficiencies and sometimes even corruption. Most importantly, however, they have high opportunity costs, a term economists use to describe the forgone benefit of an alternative course of action that might have been taken instead. Because every euro spent on a particular subsidy cannot be spent on other things.
100,000 roofs for a scoop of ice-cream
Förderung der Photovoltaik in Deutschland. Nach der Abwahl der konservativen Regierung von Union und FDP im Jahr 1998 wollten SPD und Grüne mit dem „100 000 Dächer-Programm“ ein deutliches Signal für die Förderung der Sonnenenergie setzen. Über das im März 2000 eingeführte „Erneuerbare-Energien-Gesetz“ oder kurz EEG wurde regenerative Energie fortan mit festen Vergütungssätzen gefördert. So viel „wie eine Kugel Eis“ im Monat sollte das die Verbraucher in Deutschland kosten, wie der grüne Bundesumweltminister Jürgen Trittin 2004 öffentlichkeitswirksam verkündete.
In actual fact, the programme racked up costs of 200 billion euros in the 22 years the EEG was in effect, according to the Frankfurter Allgemeine Zeitung. The Verivox price comparison platform says this translated into a total cost of 3583 euros for a typical household with a yearly usage of 4000 kWh.
True, those millions in government money boosted the development of Germany's solar power industry, but the boom was short-lived. As early as the 2010s, former industry champions such as Q-Cells or Solarworld went out of business. The guaranteed EEG money “made companies sluggish”, the Handelsblatt business daily wrote in 2012. “It lured the former pioneers into a state of complacency and, much like a slow-moving poison, robbed them of their innovative power.”
China is dominating the market
It has been corporations from the Far East, especially from China, that picked up the mantle and developed into innovation powerhouses. Because on an international level, the EEG was immensely successful. At least 65 countries emulated the ideas of the EEG and supported their own domestic solar power industry. It all turned into a veritable subsidy race that ended with Chinese manufacturers dominating the global PV industry today. But it also accelerated a massive fall in prices for solar modules that has made solar power a competitive alternative to fossil fuels much faster than anticipated. Germany might have done the world a service in that respect, albeit a very expensive one.
Marc Oliver Bettzüge, Director and General Manager at the Institute of Energy Economics at the University of Cologne, says the EEG's complex impact structure made it nigh-impossible to arrive at a definitive assessment of the act's positive and negative consequences. Without those investment guarantees the expansion of Germany's renewable energy sector would certainly not have been as fast as it was. On the other hand, Bettzüge says, investors received excessive returns, risks were socialised and the market price was distorted.
Stefan Kooths, Director of the Business Cycles and Growth Research Center at the Kiel Institute for the World Economy (IfW), sees subsidies as a useful tool in principle, “as long as they support fundamental research without any direct impact on industrial applications”, as he recently wrote on “Merkur.de”. This was particularly important with a view to the transition to renewable energies, he says, because it meant that new knowledge could be scaled on a global level: “In that case, the purpose of subsidies is not to gain a knowledge advantage over the rest of the world but to share new knowledge as quickly as possible so that it may be used to reduce emissions.”
In the early years of the FRG for instance, coal and agriculture were heavily subsidised, two industries that even then didn’t have a rosy future.
Price caps exacerbate the very problem they are supposed to solve.
Indeed, the necessary decarbonisation of the world has revived the debate about subsidies. Governments across the globe are introducing support programmes – to the point that a new subsidy race might be upon us. In the US, the billions promised in the “Inflation Reduction Act” will only be paid to companies setting up or keeping production in the United States, contrary to the EEG in Germany. This has prompted numerous companies to announce large capex projects in the United States, which leads to mounting pressure on Europe to introduce subsidies of its own to protect its interests.
Price caps are popular
In February, the European Commission presented its “Green Deal Industrial Plan for the Net-Zero-Age”, which to Kooths is nothing short of “a watershed moment in industrial policy (...) – turning away from market-based solutions in favour of holistic state control.” One of the most popular political instruments right now are price caps of all sorts, something Kooths is warning against in no uncertain terms: “Price caps are in fact exacerbating the very problem they are supposed to solve”, he says; and his colleague Oliver Holtemöller at the Halle Institute for Economic Research points to what happened in 2022: according to figures provided by the Federal Ministry for Economic Affairs, the massive increase in fossil fuel prices triggered enormous technological advances in the energy sector of almost seven percent, more than twice the historical average of 2.7 percent per annum.
The latest Subsidy Report doesn't include those price caps, yet, because it was finalised in the summer of 2021. Which means we can expect the next one to published soon, because the government is legally required to submit the Subsidy Report to the two chambers of parliament (Bundestag and Bundesrat) every two years. The legal framework also requires a “regular evaluation of subsidies with regard to targeting and efficiency as well as a sustainability review” as “core elements of effective subsidy controls”.
Real consequences are hardly to be expected, though, as one the most popular subsidies included in the report shows. Since 2006, private households have been able to deduct a maximum of 1200 euros per year for “household-related and craftsman services” from their income tax base. Already three years later, it was recommended to eliminate that tax incentive after a scientific evaluation. In 2011, the Bundesrechnungshof, the supreme audit institution in Germany, confirmed that the incentive had produced “unacceptably high windfall effects”. Another review concluded that the intended reduction of undeclared labour was “very limited”, even though that had been a key argument for introducing the subsidy, which was one of the 20 largest tax breaks in 2022 with a volume of more than 2 billion euros.
Even after three negative evaluations, there is no debate about this particular subsidy. And anyone who knows how the political system works can clearly see why: eliminating tax incentives is much harder than granting them. Not even introducing a time limit or a degression for deductible craftsman services – something that has been called for repeatedly – is on the table. At least the cinema subsidies are going to expire at the end of this year, even though on page 259 of the “Subsidy Report 2019-2022” the “Zukunftsprogramm Kino” is described as follows: “The programme has gotten off to a successful start; it contributes significantly to the continuity and future security of the cultural diversity of the cinema infrastructure.”
Speaking of which: Odenburg's “Lichtblick” cinema treated itself to “Avatar 2 – The Way of Water” to celebrate the premiere of its new projection system that has been paid for in part with government money. That blockbuster is number three on the global list of highest-grossing films and earned well over 2 billion US dollars.
Margaret Heckel works as a journalist, moderator and author, focussing above all on demographic change and the transformation of work. She gives talks and teaches workshops across Germany.
Margaret Heckel works as a journalist, moderator and author, focussing above all on demographic change and the transformation of work. She gives talks and teaches workshops across Germany.
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