Germany’s main industrial lobby has launched a blistering attack on Angela Merkel’s coalition government, saying its policies were damaging German companies and it had lost the confidence of business.

Dieter Kempf, head of the BDI, told an annual gathering of German business leaders that the government had failed to put policies in place that would help the country’s industry prepare for the coming economic downturn.

“The coalition has squandered a large part of the trust people placed in you,” Mr Kempf told Ms Merkel, who also attended the event.

He was speaking as the future of the German government hung in the balance, following the shock resignation of Andrea Nahles, leader of the Social Democrats, who are the junior partners in Ms Merkel’s “grand coalition”.

The move came a week after a European poll that saw both the SPD and Ms Merkel’s Christian Democrats record their worst result in a national election since the second world war. The Social Democrats saw their share of the vote shrink to just 15.8 per cent — down 11 points on the last European election in 2014 — and were pushed into third place by the Greens.

Speculation is mounting that the SPD could pull out of the government earlier than 2021, when Ms Merkel’s fourth and final term as chancellor expires, to try to rebuild itself in opposition.

Business leaders, already hit by a global slowdown, fear the political instability in Berlin is distracting the government from essential economic reforms. Ministers expect economic growth of just 0.5 per cent this year, following an expansion of 1.4 per cent last year.

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German businesses have long complained about soaring energy costs, a heavy tax burden and the woeful state of Germany’s digital infrastructure, with companies enduring some of the slowest internet speeds in the EU.

Yet any attempt by Ms Merkel’s CDU/CSU to push through business-friendly policies such as tax relief for high earners will only encourage leftwingers in the SPD to demand that the party quit the coalition.

Ms Merkel fought back against Mr Kempf’s accusations on Tuesday, saying German business had also “lost the confidence” of society, thanks to the diesel emissions scandal.

She listed measures that the government had undertaken over the past few months to help business, such as a new immigration bill that should make it easier for companies to attract skilled labour.

The chancellor said the coalition had also adopted measures to ensure all schools had a fast internet connection, that Germany spent 3 per cent of gross domestic product on research and development, and that it invested more in artificial intelligence.

But that failed to impress business leaders. Mr Kempf said business expected the government to provide answers to the big questions facing society. Instead, it was “working its way down a list of small-bore policies” solely designed to improve the governing parties’ performance in the next opinion poll. It was also wedded to an “unhealthy degree of redistribution”.

“Social spending just keeps growing, while the coalition will only invest an extra €1bn to promote artificial intelligence by 2023,” he said.

Among Mr Kempf’s demands is a reduction in the average rate of corporate taxation from 31 to 25 per cent, closer to the EU average of 22 per cent. He also called on the government to speed up its buildout of Germany’s electricity grid, claiming that only a quarter of the 7,700km planned extensions of the network had been permitted or completed.

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“We find it hard to discern a clear economic policy in the work of the government,” Mr Kempf said. “[It] is simply managing the status quo.”

Via Financial Times