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ifo Viewpoint No. 202: Germany’s new industrial policy
By laying out his national industry strategy 2030, German Federal Economy Minister Peter Altmaier has kickstarted an important debate. How is Germany’s future as an industrial location to be secured? Many see technological change, US dominance in digitalization, and China’s ascendency as a threat to traditional industrial countries like Germany. Is a new national industrial policy the right reaction? There are three fundamental problems with industrial policy. First, politicians know no more than private investors about which technologies will win out in the future. Second, they tend to be worse than the private sector at terminating failed projects in good time. And third, there is the danger that long-established, politically well-connected companies will abuse industrial policy in order to secure privileges at the expense of competitors, taxpayers, and consumers.
ifo Viewpoint No. 184: What It Will Cost Us If Donald Trump Is Serious
Free trade? Open markets? Both no longer seem to be the order of the day. Instead 2016 and 2017 may well go down in economic history as the years that ushered in a drastic change in economic policy course and saw it veer towards protectionism. Things all began with the Brexit vote by the British, with the climax to date being the Americans’ decision to elect a president who openly favours isolation by voting for Donald Trump.
Ifo Viewpoint No. 176: Italian Banks Should Not Be Allowed to Sidestep Investor Bail-In!
Should Italian banks crippled by non-performing loans be bailed out at the taxpayers’ expense? For a long time this kind of bank bail-out was common practice. Germany is no exception to this rule. One of the lessons of the financial crisis was that bank losses must no longer be passed onto taxpayers. That is why the European banking union rules strictly limit state funding for ailing banks. It is only allowed after private investors have sustained losses amounting to at least eight percent of the balance sheet total. Exceptions are possible in a crisis, for instance, that poses a threat to the banking system of the Eurozone as a whole. This is not, however, the case with the Italian banking system.
ifo Viewpoint 255: The Future of Germany’s Debt Brake
The recent ruling by the Federal Constitutional Court has reignited the debate over Germany’s debt brake mechanism. Amid growing calls for reform, some critics advocate its complete abolition, while others propose exempting investments from the debt brake. Let us examine these suggestions.
ifo Viewpoint No. 208: The Debt Brake Is the Target of Criticism – But It Supports Sustainable Fiscal Policy
Criticism of the debt brake enshrined in Germany’s Basic Law is growing. In view of the downturn, more and more politicians and economists are arguing that the debt brake stands in the way of reasonable economic policy and is an obstacle to public investment. What should we make of these accusations? It is right to ask, ten years after the introduction of the debt brake, whether this instrument is outdated. But the criticism is overblown. The hopes that some people pin on an end to the debt brake are unrealistic. And the debt brake by no means prevents policymakers from taking economic countermeasures in the event of a crisis. The German economy is weakening, but current forecasts expect it to stabilize in 2020. Only if, contrary to expectations, the downturn were to worsen would it be worth considering a debt- financed stimulus package. Then the government could take countermeasures by improving depreciation for investments and moving up the planned abolition of the solidarity surcharge from 2021 to 2020.
ifo Viewpoint No. 191: Three-Step Plan for a Better European Monetary Fund
The European Commission has proposed further developing the European Stability Mechanism (ESM) into a European Monetary Fund (EMF). Firstly, the European Council should be given a greater say and should be able to approve or reject bail-out programmes. Secondly, it proposes giving the EMF more instruments and more money to support crisis-afflicted states and banks. Thirdly, the EMF should be obliged to report regularly to the European Parliament and national parliaments on its activities, with a view to achieving greater democratic control.
ifo Viewpoint 258: A New Trump Era and Its Consequences
After the Super Tuesday primaries on March 5 at the latest, it will be a certainty: Donald Trump will be the Republican candidate for the US presidential election. What then? An election victory for the unpredictable politician in November would have far-reaching consequences for Europe and the rest of the world. Not only in terms of foreign and security policy, but also for international trade and climate policy.
ifo Viewpoint 242: Wanted: Geoeconomic Strategy for Trade Relations
The planned investment by the Chinese state-owned group Cosco in HLLA, the operator of the Port of Hamburg, has triggered a fierce dispute. Critics of the investment argue that the Chinese government would gain unwanted control over the port facilities. Supporters, meanwhile, maintain that it is only a minority stake and that the German government is in a position to impose conditions on port operators, regardless of who the owner is.
ifo Viewpoints 225: Europe in Competition with China and the US: More Strategic Autonomy, but Not More Autarky!
Europe’s share of the global economy may be declining, but the EU remains a major economic power with strong ties to the rest of the world. If its pursuit of strategic autonomy devolves into a push for protectionism or even autarky, it risks losing that status – and becoming more vulnerable than ever. When it comes to economic growth, Europe has been lagging behind the world’s other major economic powers – the United States and China – for some time. No surprise, then, that the old continent’s relative weight in the global economy is declining fast. How vulnerable does this leave the European Union – and what should EU leaders do about it? When the Iron Curtain fell in 1989, the countries that comprise today’s EU, plus the United Kingdom, accounted for 27.8% of global GDP (in terms of purchasing power parity). For the US, that share was 22.2%. China, with a share of 4%, still hardly registered as an economic power. Thirty years later, the EU, together with the UK, accounted for 16% of global output, still slightly ahead of America’s 15%. The big shift was in China’s position, which had surpassed its Western counterparts with a share of 18.3%.
ifo Viewpoint 249: Four-Day Work Week? No Longer in Keeping with the Times!
Debates about the number of working days per week are nothing unusual in Germany. In the 1950s, the six-day week was the norm until the unions pushed through the reduction of working hours with the slogan “On Saturday, daddy belongs to me.” After many decades in which the five-day week was the norm, Germany and other countries are now intensively discussing the introduction of a four-day week.
ifo Viewpoint No. 190: Sustainable Fiscal Policy Calls for More Restrictive Debt Rules for Eurozone
One of the key issues on the table in the coalition negotiations is the next German federal government’s position on reforming European Monetary Union. One of the highly controversial topics under discussion is the future of European debt rules. Critics claim that the current rules are too restrictive and will hamper public investment. In reality, a serious application of the existing concepts for ensuring sustainable fiscal policy would call for stricter, not softer debt rules.
ifo Viewpoint 257: The Climate Bonus: An Ineffective Tool
In the ongoing debate over climate protection and rising CO2 prices, there is a growing demand to redistribute CO2 pricing revenues directly to citizens, instead of channeling them into government spending programs. In Germany, a popular tool has been proposed for this purpose: the “Klimageld” or climate bonus. This concept involves returning the CO2 pricing revenues to the public as a uniform per capita amount.
ifo Viewpoint No. 201: Creating a Shareholder Culture and the Germans’ Treasure
With his proposal to promote equity-based saving, the German conservative politician Friedrich Merz has placed an important topic on the agenda. Germans are busy saving, but a large part of it ends up in their savings accounts. In times of zero interest this is not a good investment. Demographic ageing means that payas-you-go pensions are falling. The resulting pension shortfall is pretty hard to fill with savings at zero interest rates. Shares offer a higher yield in the medium term.
ifo Viewpoint 222: How We Enable Openings without Triggering a Third Coronavirus Wave
No-Covid does not mean that lockdown measures will be endlessly extended or even tightened until the virus disappears. Coronavirus crisis management in Germany, as in other Continental European countries, has reached a dead end.
ifo Viewpoint No. 183: Brexit Negotiations: Germany Must Make a Case for Free Trade with Britain
The time has finally come. In a few days the British government will formally declare Britain’s exit from the EU. The country’s EU membership is expected to end in March 2019. The terms of Britain’s exit and its future relations with the EU will be defined in the intervening period. If no agreement is reached, economic relations between the two parties will be governed by World Trade Organisation (WTO) rules. This would mean tariffs ranging from between five and ten percent on many goods, with far higher rates applying in some cases. Trade in certain services may even become impossible.
Ifo Viewpoint No. 177: Income tax relief can be financed
Taxation policy could be a major campaign issue in Germany in the coming year. The CDU SME Business Union has recently called for a lowering of the income tax in Germany. Tax cuts have not played a major role in the economic and fiscal policy debates of recent years, for various reasons. Firstly, after anchoring the “debt brake” in the German constitution, the reduction in public deficits has been the focus of attention. Secondly, in recent years the debt crisis in the euro area has kept politicians on tenterhooks.
ifo Viewpoint 215: The Coronavirus Epidemic: Economic Consequences and the Need for Political Action
The current coronavirus crisis is plunging Germany into a complex economic crisis, the dimensions of which many people still underestimate. It is exposing the German economy to a simultaneous supply and demand shock. In addition, there is a risk that the supply of credit to the economy will be disrupted and that the sovereign debt crisis in the euro area will return. In terms of economic policy, the right response involves a combination of massive support measures that must be targeted precisely and enacted quickly.
ifo Viewpoint No. 207: Net Wealth Tax: The Wrong Answer to a Justified Question
A growing number of people in Germany are calling for a revival of the wealth tax. The Social Democratic Party (SPD) isn’t the only one that favors a wealth tax – the Greens have voiced their support, too. The justification given for this demand is the increasingly unequal distribution of wealth, which owes primarily to the boom in real estate prices. Is this a good idea?
ifo Viewpoint No. 189: Germany’s “Jamaica” Coalition and its Economic Policy
The recent Bundestag elections have transformed the political landscape in Germany. The grand coalition has been kicked out and the extreme right-wing Alternative für Deutschland (AfD), which often peddles provocative populist slogans, is now present in Germany’s parliament. This is causing quite a commotion, overshadowing the fact the AfD actually only won 13 percent of votes, and will not participate in government. It is time for politics to focus on the question of how a new government can be formed and what needs to be done for Germany to master the challenges ahead and effectively exploit opportunities in the future.
Ifo Viewpoint No. 171: Accountability Bonds
Progress has been made in overcoming the economic crisis in the euro area, even though further adjustments are needed. Efforts to restructure public finances, however, are flagging and meeting with increasing political resistance. There are serious shortfalls in the governance and coordination of fiscal policy. The European Fiscal Compact stipulates that member states reduce their budget deficits towards the upper ceiling of a structural deficit (corrected for cyclical effects) of 0.5 percent of GDP. In reality, however, the structural deficits in many countries are rising. Yet no serious efforts are being made on the part of the European Commission and Council to enforce the debt rules. Implicit joint liability through the ESM and the ECB bond purchasing programmes undermines incentives for sound fiscal policies.