Transcription
Higher energy prices due to the war in Iran hit Germany's economy very hard. This year, a projection says the growth will be close to zero. What can the German government do to change that? What are the impacts on Europe and the rest of the world? These pressing questions I would like to discuss with Marcel Frcher. Lassel Fraudger is one of the leading economists in Germany and he's a professor here at the Humboldt University in Berlin and he's the president of the renowned German Institute for Economic Research DIW in Berlin. Masel Frager is joining me via video link. Thanks for your time this morning.
Mr. Fraudger, let's start uh with the situation in Germany. The gross projections are dire only 0.5% inflation up to 2.7%. Um is Germany heading to a recession?
>> Under the current projections, Germany is not heading for a recession. U.5% is the forecast the government gave last uh last night or on on on Wednesday um for Germany for this year. Um now one should be very honest and frank. This is the positive the optimistic scenario under which there's no escalation of the war in the Middle East. Uh if we have an escalation of the war uh meaning uh an extended closure of the street of Hormuz um less delivery of gas, oil, fertilizer uh yes then it is quite likely uh that the German economy could move back into recession. Uh but so far at least uh we hope uh that energy prices um will stabilize and if the war ends um that the recovery can take place.
>> The 0.5% growth um mostly due uh to investment by um public uh u institutions. So it's financed by public debt additional debt called some somehowically Zonda but it's debt. Uh so if that is not there then what happens? How long can Germany afford to do that?
>> Well first of all is the job of the government uh to stabilize the economy in bad times and we think we are in bad times. So the government is doing the right thing. I think the government actually should be doing more. It should provide more of a stimulus. It should um spend more on public investment. Uh the special fund that you just mentioned is important. There's plenty of money close to 500 billion euros still in there. Uh so now is the time actually to speed up uh public investment. Um and you know the economy is 70% psychology, right? It's it's about confidence. It's about trust. Um and um that's where the government comes in. It needs to signal very clearly to companies but also to citizens. Uh we will do what is necessary uh to help support companies and citizens. Um and it has not done that yet. So far the government has acted uh uh according to the principle of hope saying oh hopefully it won't get any worse. uh um so we don't have the money to spend more for instance to help government companies or uh to help citizens um weather this crisis. Um so in short I think we will need to see more government action uh rather than less.
there are the short-term measures to somehow cushion this energy price shock we have due to the Iran war. But the government is not um unified in that. You have the the one part the Christian Democrats, the conservatives that say well we cannot um you know pay out everybody for that not reimburse everybody for that. On the other side the social democrats demand more. They even want a windfall profit tax. And you say psych uh psychology is very important. So is this supporting the trust into the government?
>> No. Uh what the government has been doing so far in this energy crisis is um is weak. it doesn't signal uh that the government has understood that it needs to act more decisively that it needs to stand together and needs to conduct big reforms. Uh and one of the controversial points within the government is how to finance that. Um the German government, the German finance minister uh will present um the uh first draft of the budget for 2027 uh next week. And um at least until a few weeks ago we had a deficit of 2030 billion euros within the current planning. Uh so the government needs to plug a huge hole and on top needs to spend more uh to support companies and citizens in this crisis. And the controversial point is how is it going to do that? Um and as you said there's no appetite to increase debt. uh there's no appetite to increase taxes and if you rule out both um then there's no way to fund additional spending and um this is the the deadlock we have currently in the government.
>> There are demands like uh populist demands from the left and the rightwing tax the rich um give us the money back. Do you think that populace can somehow thrive in this crisis and and contradict the measures the the government is trying to take?
>> Yes, we see a dangerous shift to the righting extremist AFD party also uh in this crisis. Uh the AFD is now according to some polls the strongest party stronger than the Conservative Party and the party of Chancellor Mets. Um and because um the AFD is promising we don't need to change any anything. We can just give you more money. Uh we need to import the fossil fuels from Russia once again and everything will be fine. Of course, that's a lie. Um but um someone needs to tell the citizens that's not going to h uh that's not how it's going to work and uh this government is is divided uh it's not communicating well um it's not signaling look we have the solutions that's what we're going to do um and that's eroding trust in the government so false claims by the non-democratic AD and um a lack of reforms poor communication by the government
>> the structural deficits of the German economic community were there before the Iran war already there were always demands to do reforms which never happened. Are you confident that now this will give a push actually to to change the business model and to do reforms?
Well, the sad thing in many democracies and Germany is no exception is that um governments are able to conduct really fundamental structural reforms only when when they're with the back of the wall when it's really when they're so deep in a crisis that only reforms can be a way out. And um my fear is we are not at that point yet. We are getting closer. Uh but so far the government really has avoided painful reforms um to p to the pension system uh to health care um to taxes um to subsidies uh that which of which you have plenty in Germany and so far the government has tried to to muddle through by basically telling people oh you know we will keep spending and you don't have to uh to worry um you will get continue to get the support and and it's really high time for the government to be more honest and say look uh we have some tough years ahead of us. Uh we need the structural reforms. Everyone will be will have to tighten the belt. Uh there's no no one who is exempted from that. Uh that's a kind of narrative uh and communication I strongly believe uh we need now in Germany. Um so burden sharing um honesty uh and deep structure reforms. And um as I said, I think we are not yet there yet, but my hunch is we are getting there within the next one or two years.
>> Let's widen the perspective a little bit. What does a weak German economy mean for Europe and the rest of the world? Germany is the biggest economy in Germany and the third biggest in in the world. So what impact does that have? Is Germany dragging everybody else down? Also,
>> Germany's dragging Europe down. Germany is not dragging the world down because globally Germany is a tiny economy with a small economy with a small share of global GDP. Um, less than 2%. Um, and of course for many products globally there are alternatives from China, from the US, from Korea, from elsewhere in the world. But for Europe it is a real problem because we have very extensive uh complex value chains within Europe. So German industrial companies are not performing. Um if they have to cut uh production, many other European companies directly will feel the impact. Not just the neighboring countries, Austria, Poland, uh the smaller countries around um but all of Europe and um so for Europe it is a problem for the world. I would say it is not and uh we shouldn't expect that um Germany will get the support from the the from the from US or China uh now where it is in in difficulty
>> the trade the German export is also going down or stagnating at least um who is responsible for that is it only the tariffs done by the US administration or is there also a a false business model now within Germany are the companies are doing the right thing.
>> The export weakness um the contraction in export um exports over the past few years in Germany is a result really of three factors. one um global trade conflicts, tariffs from from uh from the US um also in more protective uh and protectionist China. Uh that certainly plays a role. Second high energy cost um we have a very high share of energy intensive companies and industries in Germany. Uh those companies are suffering and um they are losing competitiveness. And third, and that's also part of the truth, um, German industry companies, at least some of them have made big mistakes. Uh, and the German automotive sector is the best example. Uh, the, uh, the reason why, uh, they are in such difficulty today. um that actually didn't start 2 years ago or 3 years or four years ago with the Ukraine war that started actually in 2018 2019 when the decline started and um they have not managed to uh to be innovative they have stuck to old technologies uh rather than moving to e-mobility to electric cars battery technology and so on. So these are the three factors um that account for the weakness of exports. Um two of them external to the German economy but one of them uh can be changed and needs to be changed.
>> You have mentioned the the Europe and the European Union the commission is not um well promoting measures like tax relief or tank rebate or windfall profits. So the European level is not doing much. Is that the right course? Does that support Germany?
We need a lot closer European coordination on everything from energy policy to industrial policy to climate to uh infrastructure and so on. Um, now we should be very clear Germany has uh extracted far more exemptions from European rules for instance state aid rules than any other European country over the past 5 years. So Germany has often done their own national policies even if they went against European rules uh and pressured Brussels pressured the European Commission to get um get through with that. Um, the tankat so the the rebate on on gasoline and and diesel is the best example. It's extremely poor economic policy. Uh it means part of the 17 cents that the German government is now subsidizing uh gasoline and diesel uh is actually ending up in the pockets of the petroleum companies. Uh second uh it leads to the fact that people are reducing uh their driving behavior much less than what it is necessary to to uh address the shortage of gas and oil that we currently have. Uh so this is really poor policy and um I wish the European Commission actually blocked Germany from doing it because it's against the European rules. It's bad economic policy. It's bad social policy. It's bad energy policy. It's bad in any every sense except that it's populist and tries to signal uh to citizens we are doing something even though if that's what what they're doing is counter counterproductive.
>> The price shock shows us again how dependent um economies are still on on fossil fuels. Um, is this a reminder that the inner ghee vendors or the change towards uh more sustainable sources should be faster? Is that even possible or is that a solution?
>> Well, it's the only solution, right? If you want to reduce your dependence on imports of um oil and gas from autocratic regimes like Russia um or many of them in the Middle East, uh the only way to one get access to cheaper energy and second um to be less dependent uh and increase your your autonomy. It's building up renewable energies much faster. uh and clearly the restrictions to that. We need to invest a lot more in in infrastructure, energy infrastructure in Germany that's that's happening um and high cost for fossil fuels actually will speed up that transformation. Uh so that in a way is helpful even if I understand that high fossil fuels, high gas prices um is a problem for some citizens
>> and saving energy in the situation right now. Would that be a good advice just to to lower the demand and lower the prices with that?
>> That's the best advice and the best policy path we can go and I think that's seems to be too complicated but it's to explain but it's the absolute crucial point. We have 10 to 15% less oil and gas currently. So we need to save 10 to 15% uh in our consumption and there are two ways of doing it. One is through prices prices shooting up uh as they are as they do uh and let the market allocate who is cutting consumption where uh or you could say let's actually think really hard um where can we cut consumption where it hurts us the least. And for instance, the speed limit on highways um would actually do quite a bit uh to reducing the demand for for for gasoline and diesel. Uh having days without driving, having restrictions on using the car in cities where there really alternatives to using the car uh is a much smarter way than letting only the price do the allocation. Uh in particular from a social welfare perspective.
>> Let me ask this. Um for a conclusion, we have talked about a lot of bad numbers and dire straits and things that can go wrong. Do you see anything optimistic uh light at the tunnel of the light at the end of the tunnel? We say it's psychology. So where's the optimistic outlook?
>> Um I'm an optimist by profession. So um I do believe as I said uh throughout our interview um governments in particular in democracies sometimes need a strong push to have the courage to undertake fundamental reforms and we are getting close to that point where the German government can no longer muddle through where they are faced with we have to act now. We have to get rid of red lines and taboos. We need to have a fundamental reform of our tax system. Second, we need to have a fundamental reform of social security. Third, we need to push a lot more investment in innovation um and and productivity. And fourth and equally important, uh we need to engage much more strongly with Europe. Uh and that's kind of for me the most important point that we neglect. Only if we have a strong unified voice in Europe will we be able to um push back against China and the United States uh and will we be able to pro protect European interest, protect industry, give them really uh a good perspective to compete in global markets.
>> Marcher, president of the German Institute for Economic Research, thank you so much for your insights.
>> My pleasure.