ifo President Fuest in Favor of Changes to the “German Business Model”

Germany will have to switch some of its gas supply to liquefied natural gas (LNG), Fuest says, which implies considerable cost due to the investment in ports. Whether the fixed costs of gas in Germany will rise more than in other countries in the long term is not certain. But the new infrastructure is expensive, and energy supplies will be compromised as a result, at least for a transitional period of a few years. This will have negative consequences for Germany in terms of attracting energy-intensive industries.

In addition, Fuest says, Germany must pay more attention in the future to avoiding critical economic dependencies. This applies above all to raw material imports. A situation where supply is highly concentrated should be avoided. Corporate countermeasures range from more suppliers to more warehousing and more recycling of raw materials. However, there is no guarantee that precautions taken at the level of individual companies will lead to the best results from the perspective of the economy as a whole. And while avoiding critical dependencies comes at a cost, it is better than scaling back international economic relations or restricting trade to Western-style democracies.

In the case of the additional defense spending, Fuest says, the government has opted to finance it initially through new government borrowing. In the medium term, however, it will not be able to avoid raising taxes or cutting government spending in other areas. The extent to which the associated burdens will be absorbed by cuts or restructuring of government spending on the one hand or higher taxes on the other will be the subject of political negotiations over the coming years.