The New Geoeconomics – German Economic Policy in Times of War and Energy Crisis

German Economic Policy in Times of War and Energy Crisis

Russia’s attack on Ukraine on the morning of February 24, 2022 fundamentally changed the world. At a stroke, answers had to be found to questions that had never had to be asked before: How would the war change the world as a whole – and how much would it change individual countries like Germany? What can policymakers put in place to mitigate the consequences for the economy and society, for the people who live and work in these countries, and for those fleeing from Ukraine and looking for a safe, new home, or at least a temporary one? And in what ways will the shock of the war change the energy markets and the geoeconomic position of China, Russia, the US, and Europe, with Germany at its heart? What are the consequences of rising inflation, and how can it be curbed?

Back in April, a special edition of ifo Schnelldienst focused on the economic consequences of the war in Ukraine and the associated new geoeconomic era.

• The ifo Institute regularly published articles on the challenges of the war in Ukraine and energy policy, and provided solutions relating to the acute crisis and the future structure of the energy markets.
• Clemens Fuest advocated for a realignment of energy policy in Germany and Europe in an article co-written with Roland Berger, Hans-Werner Sinn, Christoph Theis, and Peter-Alexander Wacker.
• Several statements on the various relief measures taken by policymakers were issued. Here, the ifo Institute called on governments to target relief as much as possible towards those most affected by the crisis instead of adopting a scattergun approach. Particular emphasis was given to the need to send price signals so that incentives to save are not undermined by subsidies.

The ifo Institute has analyzed the overlapping crises, the consequences of the coronavirus pandemic and the war, and policy measures aimed at mitigating the economic and social consequences of the war. In addition, the ifo Institute has proposed its own economic policy measures.

The Future of the German Business Model

Ever since the creation of the social market economy, the German economy has been thriving and affording German citizens a combination of prosperity and security. Of course, the social market economy has constantly faced challenges, including several so far this millennium, such as the bursting of the dotcom bubble, the global economic crisis, and the coronavirus pandemic. The German economy has overcome all these challenges, sometimes impressively so. Is the “German business model” also withstanding the impacts of Russia's war in Ukraine, which has finally brought an end to the age of cheap energy for private households and industry? Previously, foreign trade, including trade with China, cooperation on energy with Russia, and security dependency on the US, with its benefit of lower domestic spending on arms, was part of Germany's business model. The war in Ukraine and its geopolitical consequences have cast doubt on this business model.

Appropriate strategic changes to economic policy and reforms can create a framework in which companies and their employees in Germany and Europe can continue to be successful despite the foreseeable negative impacts. Adapting the “German business model” will be detrimental to public finance and require public-sector reforms. Going it alone as a nation would make this impossible. To overcome all these challenges, greater cooperation at European level is essential. We need much more willingness to change than we have at present.

Read the full article in our 2022 Annual Report.