The consequences of the Russian invasion of Ukraine and the effects of the COVID-19 pandemic are still noticeable in Germany regarding economic policy. Predictions of high negative economic growth rates in earlier months clouded the outlook for this winter.
At this year’s Leibniz Economic Summit on 14 February 2023, the participants took a more optimistic point of view, estimating growth rates at around zero. In their discussion, the heads of the seven economic research institutes under the umbrella of the Leibniz Association focused on the question of how Europe can jointly respond to the consequences and be a strong economic player compared to China and the USA.
“We will see a recession next year, as the European Central Bank’s interest rate hikes need time to have an effect,” explained Florian Heider, Director of the Leibniz Institute for Financial Research SAFE. The economic transformation needs financing in the long term, Heider argued, because subsidies – until now – would often have been financed with cheap central bank money. However, this is not favorable for the overall economy in the long term.
“I see great potential for Europe that has not yet been unlocked: the Capital Markets Union. Unfortunately, only a few proposals have been implemented in recent years, as they are currently not a priority on the political agenda,” the SAFE Director continued. The suggestions made should not be forgotten to finance the economic transformation and strengthen Europe’s competitiveness towards China and the USA.
Achim Wambach, President of the Leibniz Centre for European Economic Research (ZEW) in Mannheim, also pointed out that change cannot be financed through subsidies alone. “At the moment, we already are in a stage of transformation. But we don’t know yet how and which companies will manage to survive it,” he said. “Further subsidies for companies are problematic, however, as they only address one part of the supply chain and should be replaced by smarter market solutions to help us finance the transformation.”
A competition for subsidies
Marcel Fratzscher, President of the German Institute for Economic Research (DIW) Berlin, is particularly critical of the possibly emerging subsidy competition. Policymaking should focus on creating better framework conditions, he said, because “we are at a turning point this year. The European Union and the German government must decide how to face the USA and their Inflation Reduction Act of 2022 to avoid getting into a subsidy race.”
To stop this competition, Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW), argued: “It is absurd to lure new energy-intensive industries like battery production to Germany, financed with state money.” After all, subsidies of this kind would simply not be sustainable due to their shifting effects.
European cooperation is decisive
To position the German economy sustainably, ifo President Clemens Fuest explained that, on the one hand, capital markets could provide money for the transformation. On the other hand, policymaking should concentrate on its basic tasks, as the European single market is currently massively neglected. “We will only be able to keep up as an industrial center if we ensure more competition.” This is achievable, he said, with the expansion of the European single market and the creation of a Capital Markets Union, which needs to be at the center of the political agenda again.
However, the current economic situation would only improve if price signals were maintained, argued Reint Gropp, President of the Leibniz Institute for Economic Research in Halle (IWH). “The state should not twist prices to make the road even rockier.” Rather, he sees the importance of supporting research in Germany in general to promote new structures and not artificially maintain old ones through subsidies.
In conclusion, Thomas Bauer, Vice President of the Leibniz Institute for Economic Research (RWI) Essen, argued that in addition to a common European approach, more advertising for Germany as a business location needs to be done so that the much-needed workforce potential would not get lost.