Guest article by Herbert Jakoby
Too little investment has been a major concern for economic policy stakeholders and experts in Germany for some time now. Private and public investment in public infrastructure, in housing construction, in machinery, plant and IT equipment at the cutting edge of technology and in modern transport systems form a country's capital stock and, together with the labor factor, determine its economic prosperity. In order to secure this prosperity for the future and expand it further, the necessary investments must be made now. This applies above all to the climate-neutral transformation of the economy, which can only succeed with a significant increase in investment.
The former coal and energy state of North Rhine-Westphalia (NRW) is particularly affected by this, as it has to replace numerous fossil fuel power plants and retool its important energy-intensive primary industry. Climate protection therefore requires a particularly strong increase in investment in NRW. However, the starting conditions for this are more difficult than elsewhere, as NRW has neglected its investments even more than other states in recent years. The investment ratio, i.e. gross fixed capital formation as a proportion of gross domestic product (GDP), has long been well below the national average in NRW. NRW therefore faces a twofold challenge: firstly, it must significantly increase its already very low investment ratio in order to secure its economic prosperity, and secondly, it must make disproportionately high investments in climate protection in order to free itself from its dependence on fossil fuels.
The deposits of hard coal and lignite had made NRW a center of fossil power generation. Due to its high power plant capacities and the availability of coking coal, the state has also been a preferred location for steel production, the chemical industry and other energy-intensive sectors of the economy. The accelerated phase-out of coal-fired power generation is increasing the pressure on the energy sector and the industrial companies affected to develop climate-neutral alternatives more quickly. This will require considerable investment, including in wind turbines, photovoltaic systems, heat pumps, thermal insulation of old buildings, the expansion of rail infrastructure, electric vehicles, charging stations, electricity distribution grids, hydrogen production and, last but not least, climate-neutral production processes in the basic industries, such as direct reduction plants for the production of "green" steel. Some of this only replaces depreciated fossil fuel-based plants with climate-neutral investments. However, a significant proportion is added "on top", partly because climate-neutral solutions are usually more expensive than the conventional investments they replace.
Gross fixed capital formation as the sum of all investments in buildings and civil engineering, machinery, plants, IT equipment, vehicles and intangible assets such as software, patents, licenses and copyrights (new plants) amounted to €121.4 billion in NRW in 2020, which is a share of 17.2% of GDP.1 In the other western German federal states, the investment ratio in the same year was significantly higher at 24.2%. If the investment ratio were the same as in the other western states, gross fixed capital formation in NRW would amount to EUR 171.1 billion, which is EUR 49.5 billion more than was actually spent. This difference can be seen as a structural investment gap in NRW, to which the additional investment required for climate protection must be added.
In a study2 , the German Economic Institute (IW) calculated an annual investment requirement of around €50 billion in 2022 for the climate-neutral transformation of the economy in NRW. The majority of this is to be understood as replacement investments for depreciated climate-damaging plants, but a genuine additional requirement for climate protection of around EUR 5 billion per year is also estimated. Due to the accelerated climate-neutral transformation that has since been decided, in particular due to the increases in raw material prices that have occurred and the need to reduce energy dependency on Russia, the director of the IW, Michael Hüther, has raised the estimate of the total need for climate protection-related investments to between EUR 65 and 79 billion per year.3 If the average value of EUR 72 billion is taken as a basis, an additional EUR 22 billion will be added under current conditions.
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1 The investment data used in this article comes from the national accounts of the federal states. Statistical Offices of the Federal States (2023): Gross fixed capital formation in the Länder of the Federal Republic of Germany 1991 to 2020, National Accounts of the Länder, Series 1, Länder Results Volume 3 (calculation status: August 2022), Stuttgart 2023.
2Demary, Markus/ Zdralek, Jonas (2022): Transformation in NRW: How can the digital and climate-neutral transformation of companies in NRW best be financed? Expert opinion commissioned by Bankenverband Nordrhein-Westfalen e.V., Genossenschaftsverband - Verband der Regionen e.V., Ministerium für Wirtschaft, Digitalisierung und Energie des Landes Nordrhein-Westfalen, NRW.BANK, Rheinischer Sparkassen- und Giroverband, Sparkassenverband Westfalen-Lippe. Institute of the German Economy IW, Cologne 2022. https://www.fin-connect-nrw.de/fileadmin/pdf/IW-Gutachten_2022-Transformationsfinanzierung-in-NRW.pdf
3 Hüther, Michael (2023): The transformation state of North Rhine-Westphalia - An assessment. Energy crisis, commodity crisis, inflation: Rescue through transformation? Lecture at the Bankentag NRW on 28.03.2023 in Düsseldorf. https://www.fin-connect-nrw.de/fileadmin/documents/aktuelles/23-03-22-Bankentag-NRW.pdf
