Mid-term Review of the German Federal Governments’ Economic Policy

Large Majority Rejects Industrial Electricity Price

The introduction of a state-subsidized industrial or bridge electricity price for energy-intensive companies is rejected by a large majority of 83% of economics professors. They argue that such an instrument would distort the incentive system for companies with regard to investments and energy savings. A possible industrial electricity price was also described as unfair and harmful to climate protection. In addition, many fear that a temporary subsidy could very easily turn into a permanent subsidy for large companies, which would be expensive and hinder structural change. Instead, strengthening the energy supply by expanding renewable energies and by using nuclear power (see also next question) is seen as part of the solution. Only 13% of the participants support the proposal for an industrial electricity price. They want to use a more favorable industrial electricity price to prevent an exodus of industrial companies and improve Germany’s international competitiveness. In this context, supporters emphasize that the subsidy should have a time limit. Around 4% answered “don’t know.”

Economists Take a Critical View of Nuclear Phaseout

A majority of 58% of German economists oppose the permanent phaseout of nuclear power in Germany. Many of the participants argue that this has cut off a climate-friendly and cost-effective source of energy. The resulting decrease in capacity to generate electricity in Germany is a burden on the competitiveness of the German economy due to high electricity prices. The economists also point out that this is a uniquely German path and that nuclear power is now being imported from countries with reactors that are much less safe. Those in favor of a permanent phaseout of nuclear power (38%) mention the high risks of the technology, the unresolved issue of nuclear waste storage, and the lack of social consensus for continued operation. They also point out that continued operation would have delayed the expansion of renewable energies. Around 4% answered “don’t know.”

The rejection of a permanent phaseout of nuclear power was already indicated in the Economists Panel from October 2022. At that time, 81% of the economists surveyed supported continued operation of the remaining nuclear power plants beyond 2022 in order to expand the supply of electricity and gas in Germany.

Buildings Energy Act Meets with Little Approval

The amendment to the Buildings Energy Act (“Heating Act”) passed by the Bundestag in September 2023 after lengthy discussions was opposed by 60% of the participants. They justify their rejection on the grounds that the regulation is too piecemeal and that it contains instruments similar to planned economies. In addition, the law leads to unnecessarily high costs for private households and increases uncertainty in the population. Alternatively, many critics see the CO2 price as a better steering instrument. In contrast, 32% of the participants are in favor of the amendment to the law. They see the law as necessary to achieve climate targets in the building sector. Among supporters and critics alike, there is criticisms that a softening of the original requirements has taken place in the legislative process. Around 8% answered “don’t know.”

Increase in Basic Allowance Meets with Rejection

A majority of 55% of economists oppose the 12% increase in the basic allowance (Bürgergeld) in 2024 as decided by the Federal Cabinet. They fear that this will significantly reduce incentives to work, especially in the low-wage sector, and further narrow the gap in disposable income between low-wage earners and recipients of social benefits. In contrast, 33% of economists support raising the basic allowance, arguing that it would compensate for inflation in the cost of living and thus reduce social inequality. Around 12% answered “don’t know.”

Approval of Increase in Minimum Wage

The increase in the minimum wage from the current EUR 12 to EUR 12.41 in 2024 recommended by the Minimum Wage Commission is viewed much more positively. This increase is supported by 64% of the participants. It is seen as positive that it is a moderate increase, but necessary to compensate for inflation. In addition, respondents emphasized that there has been a return to regular procedure and that the Minimum Wage Commission has been strengthened. In contrast, 29% of the economists oppose raising the minimum wage to EUR 12.41 in 2024. There are two camps when it comes to reasons for this rejection. One camp does not support the increase because they believe it to be too low. The other camp opposes the minimum wage in principle or at least the previous increase to EUR 12. Around 7% answered “don’t know.”

Economists Split on Lowering Income Limit for Parental Allowance

According to plans by the German government, single parents and couples with a taxable income (in the year before the child’s birth) of more than EUR 150,000 will no longer receive the parental allowance (Elterngeld) starting in 2024. This regulation divides the economists: 46% support the plan and 42% oppose it. Supporters of the reduction argue that social benefits should be focused on low-income families and that recipients of taxable income above EUR 150,000 would be able to get by without the parental allowance. Critics of the planned reduction argue that the parental allowance should not be regarded as a social benefit but as a family policy instrument and that it would therefore be appropriate to treat all families equally. They criticize that hardly any money would be saved, but that high-income women would be discriminated against. As a result, they expect that well-educated women would have even fewer children. Around 12% answered “don’t know.”

Divided Opinions on the Legalization of Cannabis

The federal government’s bill to legalize cannabis is supported by 34% of economists, while 40% oppose it. A full 26% answered “don’t know.” The rejection is primarily justified by negative health consequences, especially for children and young people. However, some participants also criticize the regulation associated with the law and would like to see even greater liberalization. Proponents of the planned legalization of cannabis point to the decriminalization of already widespread use and a possible curbing of the black market. This would relieve the police and the justice system.

Large Majority Support Increase in Key Interest Rates by ECB

In September, the European Central Bank (ECB) decided to raise European interest rates on the main refinancing operations by a further 0.25 percentage points to 4.5%, despite the weakness in the German economy. This move is supported by three-quarters of German economists. The main reason cited is that inflation rates are still well above the target. Furthermore, inflation expectations should also be lowered and the credibility of the ECB strengthened. The economists also emphasize that the ECB’s main task is to ensure price stability, and that cyclical considerations should be given only secondary importance. In contrast, 15% of participants oppose the ECB’s increase in key interest rates. They would have preferred a pause in the hikes to support the economic recovery and they also point to already falling inflation rates. Around 10% answered “don’t know.”

In this aspect, too, the German economists show a high degree of consistency with their previous positions. Despite the turbulence in the banking and financial system in spring 2023, two-thirds of the participants in the Economists Panel said that the ECB should stick to the interest rate policy it had pursued at the time and raise interest rates further. Previously, the key interest rate for the main refinancing operations had been raised to 3.5%.