Federal Chancellor Olaf Scholz speaks at a press conference after a virtual meeting with the Prime Ministers of the German federal states to discuss the country’s strategy against the spread of the coronavirus pandemic (COVID-19) in Berlin, Germany, December 21, 2021. Bernd von Jutrczenka / Pool on REUTERS

LONDON, December 28 (Reuters Breakingviews) – Germany is opening a new page. Your new Chancellor Olaf Scholz wants a greener and more digital economy, as do corporate giants like Volkswagen (VOWG_p.DE) and Siemens (SIEGn.DE). Their combined efforts will initiate a complete reorganization of Europe’s largest economy.

Failure to do so would mean a decline for German companies and a loss of jobs for their employees, but the task is a mammoth task. The country is more reliant on manufacturing and shipping things abroad than other large European economies. Exports of goods account for more than a third of GDP, twice as much as France or the UK. In the meantime, German industry contributes 18% to economic output, twice as much as in the other two large European industrial nations. The reliance on fossil fuel-intensive heavy industry partly explains why Germany’s per capita CO2 emissions in 2018 were 87% above the comparable figure for France and 59% above the UK.

Enormous public and private investments are required to retool such an economy. Take the cleaning of the auto industry. According to the refinitive median estimate, VW’s investment calculation will exceed 20 billion euros in 2022, compared with an annual average of 13 billion euros between 2018 and 2020. The construction of a local factory for the production of battery cells could cost at least as much again, which means that CEO Herbert Diess will likely need government help. Scholz will have to reconcile this with his own restrictive budget promises.

Germany’s digital infrastructure could also use a jolt. Less than one in ten households is connected to full-glass broadband, but the state-owned Deutsche Telekom (DTEGn.DE) can help. And the country needs to attract tech-savvy workers from overseas as its population ages. Scholz can help by relaxing the work permit regulations for skilled workers, while large companies like Siemens are doing their part by retraining existing employees.

The will to accomplish all of this needs to be strong in order to overcome some short term hurdles. A global supply chain crisis is driving up producer prices. Scholz’s plan to raise the minimum wage to € 12 an hour and labor shortages will drive up wage costs. All of this puts a strain on companies’ profit margins. But without short-term pain, there will be no long-term gains.

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CONTEXT NEWS

– The Social Democrat Olaf Scholz became Federal Chancellor on December 8th, ending 16 years of conservative rule under Angela Merkel and establishing a three-party coalition made up of the Greens and the economically liberal Free Democrats.

– In the coalition agreement between the three parties, Scholz committed himself to making the 2020s a “decade of investments in the future” with a focus on climate protection, digitization, education, research and infrastructure.

Edited by Swaha Pattanaik and Thomas Shum