ifo Viewpoints

ifo Viewpoint 258: A New Trump Era and Its Consequences

After the Super Tuesday primaries on March 5 at the latest, it will be a certainty: Donald Trump will be the Republican candidate for the US presidential election. What then? An election victory for the unpredictable politician in November would have far-reaching consequences for Europe and the rest of the world. Not only in terms of foreign and security policy, but also for international trade and climate policy. 

ifo Viewpoint 257: The Climate Bonus: An Ineffective Tool

In the ongoing debate over climate protection and rising CO₂ prices, there is a growing demand to redistribute CO₂ pricing revenues directly to citizens, instead of channeling them into government spending programs. In Germany, a popular tool has been proposed for this purpose: the “Klimageld” or climate bonus. This concept involves returning the CO₂ pricing revenues to the public as a uniform per capita amount. 

ifo Viewpoint 256: Saving on Social Security Contributions? That Would Need a Comprehensive Strategy

The German Federal Constitutional Court’s ruling on compliance with the debt brake has sparked a controversial debate on how to limit new borrowing in the federal budget. The question of whether social spending, which accounts for half of government spending, should be cut is particularly controversial. Since categories of expenditure such as interest, defense, and public investment are either unchangeable or have high priority, it must be clear to everyone involved that curbing government spending without touching social spending is a difficult undertaking. 

ifo Viewpoint 255: The Future of Germany’s Debt Brake

The recent ruling by the Federal Constitutional Court has reignited the debate over Germany’s debt brake mechanism. Amid growing calls for reform, some critics advocate its complete abolition, while others propose exempting investments from the debt brake. Let us examine these suggestions.

ifo Viewpoint 254: Germany as an Industrial Location

The German economy is currently in a difficult situation. Germany is the only one of the G7 countries that expects a shrinking gross domestic product in 2023. The Economist magazine asks whether Germany is once again the “sick man of Europe,” similar to in the late 1990s. The end of Russian gas imports through Nord Stream as well as rising energy prices have prompted energy-intensive industries in Germany to scale back production. Several companies want to relocate sites to countries with lower energy prices. All this has led to a debate about whether Germany is under threat from deindustrialization.

ifo Viewpoint 253: Should the German Minimum Wage Increase to EUR 14 Now?

When politicians introduced the statutory minimum wage in Germany, critics warned that it might become the subject of a bidding war in election campaigns. The solution was a commission formed by representatives of trade unions and employers to propose minimum wage increases, based on the index of collectively agreed wages. The minimum wage was to follow general wage trends, not the other way around, and for a few years this worked well. But during the 2021 federal election campaign – when the minimum wage was EUR 9.60 per hour – some parties called for an increase to EUR 12. The traffic light coalition implemented this demand in 2022.

ifo Viewpoint 252: An Interest Rate Cap Would Not Be a Good Idea

Currently, rising interest rates are making life difficult for borrowers. Anyone who has debts with flexible interest rates or wants to buy an apartment must expect interest rates of 4 % and more. Two years ago, it was often less than half that. The situation is similar for people who take out a loan to buy a car or who simply overdraw their account. In Austria, there have now been calls for the government to intervene and introduce an interest rate cap. Interest on overdrafts on a checking account should be limited to a maximum of 5 %, and the maximum interest rate for real estate loans should be 3 %. What are we to make of this? 

ifo Viewpoint 251: The Equity Pension – How It Can Mitigate the Demographic Problem of German Pension Insurance

Demographic change poses major challenges for German pension insurance: if fewer and fewer contributors face more and more pensioners, contribution rates will have to rise or pension benefits will have to fall. If the aim is to avoid both these outcomes, the pension fund will have to be supported from outside. Up to now, this has been done primarily through subsidies from the federal budget – a method that is increasingly reaching its limits. The German government now wants to help stabilize pension finances with what is known as the equity pension.

ifo Viewpoint 250: Can Economic Growth and Ecological Sustainability Coexist?

Is long-term economic growth compatible with ecologically sustainable development? This question stands as one of the most debated issues of our time. Over the past decades, growth driven by economic liberalization and globalization has brought prosperity to billions and reduced global poverty. However, this positive trajectory has come at a high cost to the environment and the depletion of natural resources. The limitations of economic growth at the expense of the environment are evident. Sustainable economic prosperity can only be achieved in the long run if it is coupled with ecological sustainability.

ifo Viewpoint 249: Four-Day Work Week? No Longer in Keeping with the Times!

Debates about the number of working days per week are nothing unusual in Germany. In the 1950s, the six-day week was the norm until the unions pushed through the reduction of working hours with the slogan “On Saturday, daddy belongs to me.” After many decades in which the five-day week was the norm, Germany and other countries are now intensively discussing the introduction of a four-day week.

ifo Viewpoint 248: The Energy Efficiency Law – A Growth Killer?

Germany’s energy policymakers are currently in the process of passing what’s known as the Energy Efficiency Act. In doing so, they are following the requirements of an EU directive. Contrary to the name, this law does not primarily regulate energy efficiency; rather, it caps the country’s total energy consumption. Final energy consumption is to be reduced significantly by 2030: by 26.5 percent compared with consumption in 2008, and by around 22 percent compared with today. It does not matter whether the energy comes from climate-neutral sources (such as wind or sun) or from fossil fuels.

ifo Viewpoint 247: The German Economic Model – Decline or Second Economic Miracle?

What is the future of Germany’s economic model? The Russian attack on Ukraine has triggered a debate about the further development of prosperity in Germany. 

ifo Viewpoint 246: The Current Banking Quake: Where Does It Come from and What Should Policy Makers Do?

The crises at Silicon Valley Bank and Credit Suisse have shaken the world of finance. While policymakers and central banks are being placatory, the markets are not calming down. Banks that very recently seemed healthy are running into liquidity problems. 

ifo Viewpoint 245: Why a Reform of the German Corporate Tax System Is Urgently Needed

The current crises have led to a debate about the future of Germany’s business model and German industry. Rising energy prices, disrupted foreign trade, and the US IRA subsidy program raise the question of what needs to be done to maintain Germany’s competitiveness as a location for companies and highly productive jobs.

ifo Viewpoint 244: Europe’s Industrial Policy and the Response to IRA

Europe is seeing a renaissance in industrial policy. Industrial policy usually involves influencing an economy’s sectoral development by means of subsidies, partial state ownership of companies, or regulations. It can also include promoting mergers of companies to form national champions – large companies which are supposed to conquer the world’s markets with their governments’ support. It’s also common to bar foreign investors from taking over domestic companies that are deemed strategically important.

ifo Viewpoint 243: Higher Wages May Help Overcome the Shortage of Skilled Workers!

There is currently intense debate in many countries about a shortage of skilled workers. For instance in Germany, despite record employment figures, according to surveys by the ifo Institute, close to 50 percent of companies say they are constrained by a shortage of skilled workers ¬– also an all-time high. From an economic perspective, there is a simple answer to shortages: higher prices.

ifo Viewpoint 242: Wanted: Geoeconomic Strategy for Trade Relations

The planned investment by the Chinese state-owned group Cosco in HLLA, the operator of the Port of Hamburg, has triggered a fierce dispute. Critics of the investment argue that the Chinese government would gain unwanted control over the port facilities. Supporters, meanwhile, maintain that it is only a minority stake and that the German government is in a position to impose conditions on port operators, regardless of who the owner is.

ifo Viewpoint 241: Europe Must Avoid a Subsidy Race

The energy crisis – especially the shortage of gas due to a loss of supplies from Russia – is plunging Europe into recession and causing social tensions and distributional conflicts. European governments are eagerly seeking ways to defuse the situation, but they will succeed only if they cooperate closely. The cross-border energy market must remain open, and the European Union should leverage its market power when purchasing gas in third countries. But without coordinated national crisis-management strategies, Europe’s response could become a self-defeating subsidy race.

ifo Viewpoint 240: The ECB’s Toxic Bond-Purchase Program

It is unclear why the European Central Bank has introduced a new asset-purchase instrument instead of using its existing Outright Monetary Transactions facility. By shielding countries from both market forces and political commitments, the Transmission Protection Instrument risks destabilizing European monetary union.

ifo Viewpoint 239: The Government Should Stay out of Wage Policy — Supply-Side Reforms Make More Sense in the Fight against Inflation

How can inflation be contained in Germany? Wages are currently playing a major role in this discussion. Trade unions point out that the current inflation rate of more than 8 percent is reducing employees’ real incomes. 

ifo Viewpoint 238: Don’t Raise the Eurozone’s Public-Debt Limit

In February 2020, the European Commission announced that it would present a plan for reforming the eurozone’s economic governance, including the rules for public debt. After a lengthy postponement due to the Covid-19 pandemic, the project is now back on the table, amid widespread calls to give governments more leeway, for example to finance climate protection spending. 

ifo Viewpoint 237: Eight Reasons Why an Excess Profits Tax Is Not a Good Idea

There are currently increasing calls to impose a special tax on the rising profits of energy companies, also known as an excess profits tax. These companies are accused of profiting from the war in Ukraine, which has led to a shortage of energy supplies and sharply rising prices. Some politicians are stoking the mood by speaking of “war profiteers” and a “tax on greed.”

ifo Viewpoint 236: We Must Not Undermine the Signaling Function of Price!

The German government’s relief package is well-intentioned. But regulation and subsidies aren’t a sustainable way to combat inflation.

ifo Viewpoint 235: Broad Tax Cuts for Gasoline Are the Wrong Way to Go

In view of drastic rises in energy prices, there are increasing calls for governments to shield citizens from the burden. The French government has announced that it will reduce gasoline tax by EUR 0.15 per liter for four months starting in April. In Germany, there is criticism that the government is earning money from the increase in the price of gasoline via VAT. The claim is that the additional revenue should be returned to the citizens. Some are calling for fuels to be subject only to the reduced VAT rate of 7 percent. Since VAT rates cannot be changed at will due to European law, German Finance Minister Christian Lindner wants to introduce a gasoline rebate – people should submit fuel bills to the tax office and get a portion refunded. 

ifo Viewpoint 234: Economic Consequences of the Russian Invasion of Ukraine

The war in Ukraine is not only a military and geopolitical turning point. It is also changing the economic situation. This affects both the short-term economic trend and the medium-term prospects for growth and prosperity. The previously expected economic recovery will be weakened. There is a threat of stagflation, i.e., a combination of weak growth and high inflation. Monetary policy faces a dilemma: while interest rate hikes can curb inflation, they would further dampen growth. 

ifo Viewpoint 233: The Coalition Agreement – A Desire for Something New

Angela Merkel was said to be careful to manage expectations. Those who promise little need not fear criticism if nothing is achieved. The traffic light government is acting differently. Its coalition agreement is ambitious. It wants to massively accelerate the digitalization and decarbonization of the economy while preserving prosperity and inclusion. 

ifo Viewpoint 232: Economic Consequences of the Covid-19 Pandemic and Lessons for Future Crises: Results from Economic Research

In addition to the damage to health, the Covid-19 pandemic caused tremendous economic costs. What can be learned from an analysis of the economic consequences and of crisis management in politics and in society? Extensive research is now available on this, although it mainly relates to the earlier phase of the pandemic: essentially experience and data from 2020. Various lessons emerge for dealing with future pandemics. The most important concerns the question of whether there is a trade-off between protecting health on the one hand and limiting economic costs on the other.

ifo Viewpoint 231: Advice from Across the Ocean

It is not surprising that German politics is attracting much international interest. Germany is the largest economy in the EU, and the country has overcome the Covid crisis with some success. Above all, it is striking that German politics is characterized by moderation. Germany held an election in which moderate parties won an overwhelming majority. Populists from the right and left were able to score points at most in the new federal states, otherwise they did not play a major role. 

ifo Viewpoint 230: A Business Plan for a Digital and Green Transformation

Negotiations for a traffic light coalition in Germany have begun in a good atmosphere, but they will still be difficult. This is especially true for fiscal policy. Here, the task is something like squaring the circle. The green and digital transformation requires considerable private investment in addition to public investment, and the former will hardly take place without substantial tax incentives. Tax relief on investment is also important to support the increasingly fragile economic recovery. At the same time, the debt brake narrows the scope for public borrowing.

ifo Viewpoint 229: The New German Government’s Economic Policy: Tackling National Tasks, Not Neglecting European and Global Challenges

Regardless of which coalition wins out in the end: Germany needs a government that is capable of tackling major economic and political challenges. These challenges are broader than the issues that dominated the election campaign. The economic consequences of the coronavirus crisis, demographic change, climate change, digitalization, European integration, and geopolitical change require decisive action and a willingness to change.

ifo Viewpoint 228: The Merkel Era: A Review of Budgetary and Fiscal Policy

The budgetary and fiscal policy record of the Merkel era contains both light and shade. The greatest success is that the stability of Germany’s public finances has suffered less during this period than in other countries, despite the fact that the economy had to weather the two deepest economic crises since the Second World War – the global financial crisis and the coronavirus pandemic.

ifo Viewpoint 227: Advantages and Disadvantages of a Reform of the Marital Splitting System

The taxation of married couples in Germany has long been considered in need of reform. The current marital splitting system provides for married couples to be taxed jointly. There is always an advantage if the partners have different incomes. This is due to the progressive income tax rate: the tax rate rises with increasing income.

ifo Viewpoint 226: Does Compulsory Insurance for Natural Disasters Help?

The dramatic flood damage in the German states of Rhineland-Palatinate, North Rhine-Westphalia, and to some extent also in Bavaria and Saxony has revived the debate about compulsory insurance for damage from natural disasters. Currently, there is no obligation for homeowners in Germany to insure themselves against flood damage. About 46 percent of all buildings are insured voluntarily, but there are large differences within Germany. In Baden-Württemberg, 94 percent have insurance, while the figure in the particularly hard-hit Rhineland-Palatinate is currently 37 percent, and in Bremen, only 23 percent.

ifo Viewpoints 225: Europe in Competition with China and the US: More Strategic Autonomy, but Not More Autarky!

Europe’s share of the global economy may be declining, but the EU remains a major economic power with strong ties to the rest of the world. If its pursuit of strategic autonomy devolves into a push for protectionism or even autarky, it risks losing that status – and becoming more vulnerable than ever. When it comes to economic growth, Europe has been lagging behind the world’s other major economic powers – the United States and China – for some time. No surprise, then, that the old continent’s relative weight in the global economy is declining fast. How vulnerable does this leave the European Union – and what should EU leaders do about it? When the Iron Curtain fell in 1989, the countries that comprise today’s EU, plus the United Kingdom, accounted for 27.8% of global GDP (in terms of purchasing power parity). For the US, that share was 22.2%. China, with a share of 4%, still hardly registered as an economic power. Thirty years later, the EU, together with the UK, accounted for 16% of global output, still slightly ahead of America’s 15%. The big shift was in China’s position, which had surpassed its Western counterparts with a share of 18.3%.

ifo Viewpoint 224: Central Bank Swerving from Its Path

The Executive Board of the European Central Bank (ECB) wants to make monetary policy “greener.” Hardly a week goes by without the topic being promoted by one of the board members. In addition to the visible effort to make the traditionally dry seeming monetary policy appear practically helpful and close to the people, the ECB’s activities in the matter itself amount to a further significant expansion of its competencies. This involves, first, independently assessing the environmental friendliness of projects financed by corporate bonds; and second, giving preference to positively rated projects in various securities transactions.

ifo Viewpoint 223: Abolishing the Debt Brake Is Not Worth It

The debt brake enshrined in Article 115 of Germany’s constitution has been the subject of controversial debate since its introduction in 2009. Critics argue that in the event of major economic slumps, the maximum permissible deficit for the federal budget of 0.35 percent of gross domestic product (GDP) is too small, even when adjusted for cyclical effects. The debt brake also leads to an excessive reduction in government debt and creates incentives to neglect public investment. Moreover, interest rates are so low that significantly more government debt can be afforded.

ifo Viewpoint 222: How We Enable Openings without Triggering a Third Coronavirus Wave

No-Covid does not mean that lockdown measures will be endlessly extended or even tightened until the virus disappears. Coronavirus crisis management in Germany, as in other Continental European countries, has reached a dead end.

ifo Viewpoint 221: The Advantages of the Division of Labor also Apply to Economic Policy: The Green New Deal

Even in times of the corona pandemic, environmental and climate protection are among the dominant topics in the economic policy debate. This is justified. Global warming is one of the greatest challenges of our time.

ifo Viewpoint 220: It Is Time to Expand the Tax Loss Carryback

The coronavirus pandemic plunged the German economy into a severe recession. Following a recovery over the summer, growing numbers of infections give reason to fear that autumn will be difficult.

ifo Viewpoint 219: Collective Bargaining in the Public Sector

On October 22 and 23, collective bargaining in the public sector will enter its third and possibly decisive round. The trade union ver.di is demanding 4.8 percent more pay, or at least EUR 150, for federal and municipal employees. While collective wage settlements apply only to salaried employees in the first instance, they are usually also adopted for civil servants. What should we make of this demand – and what is an appropriate wage settlement in the current situation?

ifo Viewpoint 218: What Does the Temporary Reduction in VAT Achieve?

There’s no lack of money: in its fight against the coronavirus recession, the German government has launched a series of economic stimulus packages, most recently just a few days ago. One particular measure in this latest package is stoking a controversial debate: a temporary reduction in VAT. Between July 1 and December 31, 2020, the standard rate will fall from 19 percent to 16 percent and the reduced rate from 7 percent to 5 percent. This will bring tax relief to the tune of EUR 20 billion. But is this measure really a suitable way to inject strength into the economy?

ifo Viewpoint 217: The Policy Agenda for the Post-pandemic Period

Many companies, employees, and self-employed people in Germany are currently struggling to cope with the restrictions of the shutdown. Nevertheless, the time has come to think about what comes next. How can policymakers support an economic recovery?

ifo Viewpoint 216: How Will an Exit from the Shutdown Work?

The Covid-19 pandemic has plunged Germany, and many other countries, into an unprecedented crisis. Restrictions on leaving the house and meeting with people have been imposed and many companies have halted production. 

ifo Viewpoint 215: The Coronavirus Epidemic: Economic Consequences and the Need for Political Action

The current coronavirus crisis is plunging Germany into a complex economic crisis, the dimensions of which many people still underestimate. It is exposing the German economy to a simultaneous supply and demand shock. In addition, there is a risk that the supply of credit to the economy will be disrupted and that the sovereign debt crisis in the euro area will return. In terms of economic policy, the right response involves a combination of massive support measures that must be targeted precisely and enacted quickly. 

ifo Viewpoint 214: Neodirigism

Bank failures, economic inequality, populism, train delays, lack of housing, pollution – all this is laid at the feet of neoliberalism. Neoliberal policies are often named as a cause of social and economic grievances. The term actually refers to a historical school of though that, in response to the world economic crisis of the late 1920s and early 1930s, demanded not less but rather more government action to establish conditions that would improve the functioning of the economy. However, people who use the term nowadays are usually referring to a disproportionate faith in the market and the state’s withdrawal from areas where it is actually needed.

ifo Viewpoint No. 213: Challenges of Negotiating a Free Trade Agreement between the UK and the EU

Now it is official: at the end of January, the United Kingdom left the European Union – and not in the hard Brexit some observers had feared but an orderly departure. That notwithstanding, Europe is already facing its next challenge. The exit agreement stipulates that the UK will remain a member the customs union and the common market until the end of 2020. By that time, The EU and the UK must have concluded a free trade agreement. If not, customs duties and other trade restrictions would enter into force. However, reaching such an agreement takes time.

ifo Viewpoint No. 211: The Economic Legacy of the Merkel Era

14 years of Angela Merkel – an economic review: Merkel’s chancellorship ushered in important reforms. Until welfare state expansion started to crowd out growth oriented policies.

Angela Merkel has served as German chancellor for 14 years. If she stays in office until the end of the current legislative period, she will draw level with Helmut Kohl, who was also chancellor for 16 years. Even so, one thing is clear: the Merkel era is drawing to a close. What is the economic legacy of her period in office?