The Economist - USA (2019-08-17)

The EconomistAugust 17th 2019 Europe 39

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I

n thebalticstates, Soviet-eraapart-

mentshavetakenona grittyglamour.

InLithuania,Instagrammershuntdown

Fabijoniskes,theneighbourhoodwhere

a recenttelevisionseriesabouttheCher-

nobylnucleardisasterwasfilmed(see

picture).InEstoniaandLatvia,theyform

a backdroptoartshowsandhip-hop

videos.Nicknamedkhrushchyovka(after

NikitaKhrushchev),theseuniform

blocksofprefabricatedpanelswerebuilt

tohouseworkersacrosstheSovietUnion

fromthe1960sonwards.

Manyweremeanttolastnomore

than 30 years.YetintheBalticstates

—where68%ofpeopleliveinapart-

ments,thehighestlevelinEurope—

manypeoplestillcallthemhome.Living

insidehistoryislessappealingthan

lookingatit,alas.For,liketheSoviet

Unionitself,theyaredrab,joylessplaces.

Foronething,theyarepoorlyinsulat-

edandexpensivetoheat.InLithuania,

forexample,heatinga two-bedroom

apartmentinthecoldestmonthscan

cost20%oftheaveragesalary.Soviet

districtsaregenerallyoccupiedbythe

elderlyandthehard-up,whoareleast

abletobearthecost.Mostalsodependon

centraliseddistrictheating,withno

optiontodisconnectorchangeprovid-

ers.Inthewinter,bitterinter-apartment

battlesarefoughtoverthethermostat.

It’snotjustchillyresidentswhoneed

betterinsulation.Theeuaimstobe

carbon-neutralby2050.Housing,which

consumes40%ofalltheeu’s energyand

belchesout36%ofitscarbon,requires

thebiggestoverhaul.Europehasdecreed

that,by2020,allnewbuildingsmustuse

almostnoenergy.It isevenharderto

figureoutwhattodowitholdones.Mass

demolitionsareexpensiveandunpop-

ular.(Residentsresistedwhen,in2017,

Moscowannouncedthatit wouldtear

down8,000ofitsownKhrushchev-era

apartments.)Retrofitting,too,isproble-

matic:inapartmentblocks,individual

ownerscanrarelyreachconsensuson

somethingsoexpensive.AllthreeBaltic

countriesoffergovernment-backed

financialinstruments,buttheirsuccess

hasbeenlimited.Residentsoftendon’t

understandtheneedforchangeand,

becausethepoorestreceiveheating

subsidies,manyhavelittledirectin-

centivetodoso.

A morehands-onapproachisneeded.

SmartEnCity,aninitiativesupportedby

eufunding,recentlysucceededinturn-

ingthreekhrushchyovkablocksinto

energy-efficient“smarthomes”inTartu,

Estonia.Withsomeoneelsemanaging

theproject,andexplainingtheprocess,

residentsweremorewillingtotakeout

loansandhandovertheirkeys.Groups

fromLatviaandLithuaniaareinterested

incopyingtheexperiment.

Sovietblocks

HousingintheBaltics

Howdoyousolvea problemlikekhrushchyovka?

Concrete for comrades

A year-on-year 8% slump in exports ap-

pears to be the main driver of the slow-

down. The uncertainty spawned by the us-

China trade spat and the prospect of a no-

deal Brexit are largely out of the hands of

Angela Merkel’s government. Demand for

German products in China is slowing. Ger-

many will be badly hurt if Donald Trump

follows through on his threat to whack ta-

riffs on car imports later this year.

Yet this is only half the story. Analysts

have long urged Germany to wean itself off

its export-dependence. Despite a mild re-

balancing, the current-account surplus

still stands at a whopping 7.4% of gdpin

the world’s fourth-largest economy. Cod-

dled by government, the automotive in-

dustry, which runs a larger trade surplus

than any other export sector, has been slow

to adjust to the rise of electric and autono-

mous cars. Politicians, from Mrs Merkel

down, have done too little to ready an age-

ing society for challenges like digitisation.

Every euro-zone economy is buffeted by

headwinds, but so far Germany’s is the only

one to have contracted in the past quarter.

A second discussion is raging over the

German government’s steadfast aversion

to borrowing. The “debt brake”, enshrined

in the constitution since 2009, rules out

borrowing to finance the structural deficit

beyond 0.35% of gdp. A related political

commitment, the schwarze Null (“black

zero”), pledges a balanced budget for cur-

rent spending. This has ensured low debt

and, since 2014, a surplus that last year

stood at 1.7% of gdp, or €58bn ($66bn). Ger-

many has thus been able to raise spending

on infrastructure, social security and de-

fence without extra borrowing. Yet as the

euro zone’s largest economy grinds to a

halt, the debate over whether to open the

spigots further is gathering pace.

So far the government remains un-

moved. But Sebastian Dullien, director of

the imkresearch institute in Düsseldorf,

says the pressure will increase. Reuters re-

cently reported that a climate-change

package due next month might include a

pledge to issue fresh debt. This week Mrs

Merkel said her commitment to a balanced

budget remains intact, but added: “We will

react depending on the situation.” Inside

the finance ministry a lively debate has be-

gun over how and whether to raise invest-

ment—although the minister himself, Olaf

Scholz, remains cautious, to the disap-

pointment of many in his Social Democrat-

ic Party (the junior coalition partner to Mrs

Merkel’s Christian Democrats). Outside

government the Greens are urging a mas-

sive boost to investment in climate protec-

tion. The government’s budgetary rules are

“voodoo fiscal policy”, said Robert Habeck,

the party’s co-leader, this week.

A short-term bump in spending, as Mrs

Merkel argues, would rub up against

bottlenecks in areas like construction. Nor

would it help remove the pall of uncertain-

ty facing German firms. So some analysts

want a credible, possibly cross-party, com-

mitment to establish a fund that would dis-

burse several hundred billion euros over

the next decade. Possible targets include

transport infrastructure, broadband net-

works, house building and help for local

governments struggling under debt loads.

Other ideas include cutting taxes on Ger-

many’s army of low-paid workers or its cor-

porations, or introducing incentives for

climate-friendly policies like retrofitting

buildings and clean fuel.

There could hardly be a better time.

Yields on 30-year government bonds are

negative, meaning in effect that investors

pay the government for the privilege of

lending it money. Even if the European

Central Bank cuts rates further next month,

the monetary toolbox is nearly exhausted.

Tax cuts and, in time, investment in infra-

structure would help rebalance the Ger-

man economy from its exports-first ap-

proach. Mrs Merkel, now in the twilight of

her chancellorship, has u-turned before,

notes Mr Dullien. But the headwinds may

need to blow a little harder first. 7