The Economic Path for Germany


Clemens Fuest is President of the Ifo Institute and Professor of Economics at the University of Munich.
Germany economy path

Somalilandsun-Angela Merkel will be Chancellor of Germany, but things cannot continue as usual. Germany faces serious economic challenges, and the new government should address them appropriately.

The first challenge is digitalization. Some are calling for a nationwide fiber-optic network, and many fear the “sharing economy”. They are worried about firms such as Uber and Airbnb. But policymakers should resist the lobbying: investment in fiber-optics should take place only where it is needed, not everywhere. And regulation should not inhibit innovative business models.

There are also fears of job losses due to automation, and calls for an unconditional universal basic income. This would mean we give up on parts of the population and surrender to unemployment. We should focus instead on training for the job opportunities of the future.

Already, Germany’s aging population is putting upward pressure on welfare costs. Both major parties have ruled out raising the retirement age to 70. There are concerns about workers with physically demanding jobs. But these should be met through higher wages and disability insurance, not through public pensions.

Globalization is also a huge challenge. Germany wants to attract companies and investment as well as high skill immigrants. Redistributive taxation and welfare transfers attract low skill migrants and drive away investment and the high skilled. Germany needs to limit the tax burden caused by subsidies to the welfare state. It also needs to limit the access of new immigrants to social transfers.

Then there is climate change. As Germany pursues emissions reductions, it should keep an eye on cost-effectiveness. Some propose a ban on internal combustion engines after 2030. It would be much better to include road traffic in the Paris agreement emissions-metering system. There are cheaper emissions savings to be made elsewhere.

Lastly, there is Europe. Here, Germany must pick its battles. I would focus on the eurozone. It is key to ensure that European banks hold fewer domestic government bonds, and that private creditors bear the burden of public debt restructuring, not taxpayers from other countries.

Clemens Fuest is President of the Ifo Institute and Professor of Economics at the University of Munich.

Copyright: Project Syndicate, 2017.