Clemens Fuest has been the head of the Ifo Institute, Germany’s most influential economic research institute, for almost two months now. He says cheerfully that he has been “well received,” and that he truly enjoys working with a “really strong team.” He isn’t nearly as cheerful when he talks about the government’s current economic policy though. In fact, the topic tends to enrage this usually levelheaded research economist from northern Germany.
Handelsblatt: Early retirement, minimum wage, handouts for the aviation industry and new subsidies for automakers: Is the federal government’s economic policy degenerating into client politics?
Clemens Fuest: In the last few years, government policy was focused on redistribution. This applies to rent control, retirement at 63, the pension for mothers, the minimum wage and the latest subsidies. Whatever the case, the federal government is not explicitly pursuing a policy of growth. There are a few good approaches in the advancement of science and research, but it should have done a lot more. It almost seems as if we are doing too well.
And now there are the dairy farmers dealing with plunging prices. The chancellor has reportedly promised to help. Is the price of milk a question of supply and demand or is it a subject for politicians?
Of course it’s a matter of supply and demand – and it should stay that way. The coalition is making a mistake by repeatedly intervening in pricing. If politicians want to redistribute income, they should implement the general tax and transfer system. Interventions in pricing lead to inefficiencies and inequities.
So you would say: Let the dairy farmers go bankrupt?
It isn’t the responsibility of lawmakers to guarantee prices and prevent farmers and other business owners from going out of business. If that were the case, the idea would also have to apply to craftsmen or innkeepers, for example. If farmers become involved in landscape conservation or other issues in the public interest, and are not compensated for their efforts in the market, government subsidies make sense. But this doesn’t apply to milk production because the market mechanisms function well there.
Chancellor Merkel seems to achieve calm and attract voters by giving something to everyone. Is this generosity risky?
The biggest risk is that we become lost in an economic policy that is limited to maximizing votes in the short term but which neglects important tasks for the future. In addition, the coalition is committing the classic mistake of throwing away money for unnecessary expenditures in good times, instead of sensibly investing the funds or keeping money in reserve for bad times. The biggest mistakes in economic policy are committed in good times.
Ms. Merkel has been chancellor for more than 10 years. How would you grade her on regulatory policy?
Unfortunately she hasn’t distinguished herself particularly well in defending the principles of regulatory policy. I wouldn’t give her more than a B minus or a C. The grand coalition – and our economy as a whole – is living off reforms of the past.
Are you referring to the Agenda 2010, launched by Ms. Merkel’s predecessor, Gerhard Schröder?
Among other things. But you do have to give the chancellor credit for stopping various mistakes in economic policy.
She stopped the reintroduction of the tax on assets. She successfully opposed the introduction of euro bonds. You have to consider that Ms. Merkel is the chancellor in a grand coalition. She has to make compromises.
But the bonus for the scandal-ridden auto industry was no compromise. The chancellor wanted it, and she got her way.
I don’t know who got their way there. From a macroeconomic perspective, at least, this bonus is the wrong approach. The money would have been better invested in environmental research.
Before Ms. Merkel became chancellor, she championed economically liberal positions. Think of the Christian Democratic Union’s Leipzig convention in 2003, when she advocated tough neoliberal policies. How much of Leipzig is still in her? Or rather, how much of Erhard is still in her?
Unfortunately, there is no evidence of any great ambition to channel former Chancellor Ludwig Erhard.
How do you explain the transformation?
When the chancellor entered her first Bundestag election campaign in 2005, after Leipzig, voters punished her for these positions. It was apparently a definitive experience. Since then, her policies have been geared more heavily toward maximizing votes than any economic policy resembling Erhard’s.
Are convictions no longer important in politics?
They are. But I do understand Ms. Merkel. What’s the point of sticking to regulatory policy principles if it gets you voted out of office? She has to find the right balance between preserving her power in the short term and choosing the right direction in the long run. Unfortunately, at the moment I don’t see her setting a course that will secure long-term growth and prosperity in Germany.
Economists have been talking a lot lately about the resilience of an economy. The German economy has grown in recent years, although not very strongly. But the next recession will come. How resilient is our economy?
In the years since the global economic crisis, the German economy has shown that it can react flexibly to difficulties and conquer new markets. But there is no guarantee that Germany will fare similarly well in the next recession. Politicians in Germany are doing little at the moment to strengthen the resilience of our economy.
Are you saying that the economy is not resilient because of government policy, but in spite of it?
Yes. In the long term, however, we need policies that create favorable conditions for economic development.
What do policymakers need to do? For years, the International Monetary Fund and the Organization for Economic Cooperation and Development have been calling for further deregulation of Germany’s skilled crafts and trades, as well as services.
The deregulation of services is important, but it is far from the only problem. I think, for example, that a reorientation of energy policy in Germany is at least equally important. The promotion of renewable energy in Germany is highly irrational and is controlled by lobbyists. We have a market system that obstructs innovation and mismanages entrepreneurial actions.
Did Ms. Merkel make a mistake with the phase-out of nuclear energy?
It was a mistake to pursue this policy precipitously and alone, without involving our European partners. The fact that European energy policy is now a disastrous patchwork is partly attributable to the German transition away from nuclear power and toward renewable energy.
Some economists say that the radical switch in direction to renewable energy was the right decision. Are they wrong?
The promotion of renewable energy per se isn’t the problem. It’s just that it needs to be implemented wisely. The various forms of renewable energy need to compete with one another, and the various tools of energy policy and environmental policy must fit together. This isn’t the case at the moment.
The government is especially proud of its balanced federal budget. However in his planning, Finance Minister Wolfgang Schäuble benefits from zero interest rates and high tax revenues, in particular. Under such beneficial circumstances, wouldn’t Greek Prime Minister Alexis Tsipras also be able to present a balanced budget?
Let me put it differently: The balanced budget is not a result of large spending cuts. Nevertheless it is a great achievement by Mr. Schäuble, who has managed to defend a balanced budget against attempts to spend excessively.
Wait a minute. Federal government spending has gone up recently, even though interest costs have declined from €40 billion ($45 billion) to €20 billion. Shouldn’t Mr. Schäuble be thanking European Central Bank President Mario Draghi for that? What exactly is his achievement here?
Of course the favorable situation should have been used to generate surpluses. Nevertheless, the balanced budget and the debt ceiling were some of the few clear and sensible directions in recent economic policy. And Mr. Schäuble has successfully defended it, even in the face of growing international pressure on Germany to incur more debt to stimulate the economy.
As far as the relationship between the German government and the European Central Bank goes, do you believe there is a sort of tacit agreement in place? The ECB keeps the euro zone intact, and the chancellor is restrained in her criticism of Mr. Draghi, even though the monetary policy has little in common with the regulatory policy principles of Germany’s central bank, the Bundesbank…
I don’t think much of these conspiracy theories. Firstly, an expansive monetary policy is currently appropriate in light of weak growth and low inflation, without our having to approve of every one of the ECB’s monetary policies. Secondly, I believe that the head of a government should think long and hard about publicly criticizing the ECB. The ECB’s independence is very important.
What is your overall assessment of the Chancellor’s euro rescue policy? Should Ms. Merkel campaign for additional loans to Greece?
Many mistakes were made in Greece. New money shouldn’t have been thrown after the money that was already lost last year. Now we are in a difficult situation for creditor nations. No one wants to allow the Greek crisis to boil over again, just four weeks before the Brexit referendum. Mr. Tsipras knows that, and he is coldly taking advantage of the fragile situation in the European Union.
So should Greece leave the euro zone?
The Greeks will have to decide that for themselves. We should preach less and pay less. Greece cannot be ruled from Brussels, and the other Europeans cannot be constantly sending new funds to Athens. Athens needs to deliver primary surpluses now – that is, a positive budget before interest payments – so that new money is not constantly needing to be sent to Athens.
But Greece isn’t just trapped in a deep economic crisis. This already overwhelmed country, together with Turkey, is being forced to play a key role in coping with the refugee crisis. Are you still as skeptical about the chancellor’s refugee policy as you were in the past?
I am very much in favor of helping people in trouble. We are doing that, and it’s great. But I’ve cautioned against believing in the illusion that immigrants will solve the financial problems of our social security system, or fix the shortage of skilled labor. For that we would need immigration by people with above average qualifications. However, Angela Merkel is not actually one of the people who claimed that immigrants would be good business.
But at least when it comes to the refugee issue, the chancellor apparently acted out of conviction and not in a calculating way, right?
That may be true, but you can also do the wrong thing out of conviction. The question of whether we want to allow so many people into the country affects the foundations of our society. And that is where Angela Merkel could be faulted, for example, for hardly having involved the Bundestag at all.
Is the integration of the immigrants too much for the economy to handle?
The anticipated burden on the domestic population is not so great that it could not be managed. But we are talking about one of several burdens.
Do you feel that integrating a large portion of the immigrants into the labor market, as the government envisions it happening, is impossible?
Of course it’s possible. The only question is how long it takes and how productive the immigrants can be in our labor market. Most of those who are coming to Germany have few professional qualifications. There is also limited training potential among many younger immigrants, because they lack the necessary educational background.
Ms. Merkel’s refugee policy and the energy transition were probably the most important decisions of her chancellorship. How would you rate the Merkel era overall? Has Germany become a better country economically during her term in office?
Germany has developed well in economic terms. However, this development was not driven so much by a well-considered growth policy as by various favorable factors. They include the reduction in unemployment driven by the Agenda 2010 reforms under Gerhard Schröder, the rapid recovery of global demand for German products after the financial crisis, low interest rates, the low euro and the sharp decline in oil prices.
Why is it often left wing governments who are better at implementing liberal economic reforms?
I don’t think that generalization applies. Just think of the conservative Thatcher government in Great Britain. It’s more likely that the willingness to reform depends on how badly off a country is.
In other words, we need to be worse off for the political world to get its act together and enact something like an Agenda 2020?
I hope we’ll be spared in that respect. Unfortunately, anticipatory economic policy tends toward the exception rather than the rule.
All skepticism aside, which policies would you recommend the chancellor focus on for the remainder of this legislative period?
It would be desirable for the government to better prepare social security systems for demographic change. We need to focus more on early childhood development in the education system, and we should also raise tuition fees. The tax system is in need of reform, especially commercial tax. We need a new energy policy – and there’s much more. But no one believes that the government will tackle major projects like a reform of the tax system or the energy sector in its last remaining year. That will be up to the next administration.
Mr. Fuest, thank you for this interview.
Jens Münchrath is an editor at Handelsblatt who covers the European Central Bank and monetary policy. To contact the author: email@example.com