Germany will have to increase spending

Germany’s new government coalition will probably have to be open about changes to the fiscal rules of the eurozone as it will itself have to increase spending in order to carry out the “green” and digital transformations of the German economy, Marcel Fratzscher, president of the Berlin-based economic research institute DIW Berlin, tells Kathimerini. “The acceptable debt ceiling will have to rise substantially,” he says.

Furthermore, Fratzscher says that the European Central Bank (ECB) must better communicate its monetary policy to the German public. He believes that weak growth is a greater risk than inflation for Europe and that a substantial rise in fossil fuels Europe-wide “over the next 10 years” is the only way of meeting the bloc’s climate targets.

Turning to Greece, the German economist focuses on the conservative government’s fight against red tape. “Such a modernization takes time and patience, and all of Europe should recognize the good work Greece has been doing over the past few years,” he says.

Asked about the prospects of the German economy, Fratzscher says it is still in the process of recovering from the Covid-19 pandemic “and probably won’t reach the pre-crisis level before mid-2022.”

“The recovery this year should be quick, but it could become more difficult in the years ahead as German companies are struggling with the green and digital transformations,” he says.

How would you describe the central idea of the new coalition government’s financial agenda? What differences do you note in relation to the economic policy mix of the previous government?

The new German government has made climate protection and the digital transformation of the German economy an important priority. This requires substantial public investment and the new government is acknowledging that it will not be able to do this without increasing spending. This will mean that the German government will try to find a way around its very own debt brake for many more years to come.

In your estimation, what will be the position of the new German government in the debate on the fiscal rules of the eurozone? What do you think is the prevailing scenario in this negotiation?

I expect the German government to be open about changes to the fiscal rules of the eurozone. The acceptable debt ceiling will have to rise substantially and Europe will have to treat investment differently from public consumption. The new German government is more pragmatic and more willing to find a common compromise.

‘It is possible that inflation will stay above the 2% target for some time. But I see weak growth, low investment and financial instability as much bigger risks for Europe’

There has been a change of leadership at the Bundesbank as well. Do you expect any changes in Germany’s strategy within the board of the European Central Bank?

The Bundesbank has played an important role in Europe over the past seven decades. I expect the new president, Joachim Nagel, to try to forge a compromise in Europe, which could make the monetary policy by the ECB more acceptable to the German public and Germany’s politicians. This does not mean that the ECB will now change course, but I expect a change in communication and cooperation.

How do you analyze the development of inflation in Europe? Do you agree with the view that this is a temporary phenomenon? How temporary?

I am not very concerned about inflation in Europe over the next five years. It is possible that inflation will stay above the 2% target for some time. But I see weak growth, low investment and financial instability as much bigger risks for Europe.

Do you detect any mistakes in the EU strategy for the green transition? Or do you consider price increases in energy inevitable?

Prices for fossil fuels will have to rise substantially all over Europe over the next 10 years. That is the only way for Europe to meet its climate objective by 2030 and to reduce the subsidies for fossil fuels over the medium term. Renewable energies are already more efficient today than fossil fuels. In the long run prices for energy could fall once the green transition has succeeded.

How do you assess the course of the Greek economy and what would you characterize as the biggest risk for economic developments in Greece?

The Greek economy is making progress and the country has implemented very good, but also very difficult reforms over the past few years. The government needs to modernize its bureaucracy and provide incentives for its most important resource: its citizens. Such a modernization takes time and patience, and all of Europe should recognize the good work Greece has been doing over the past few years.

How have the pandemic and the elections affected German economic output? What is the baseline scenario for the German economy in 2022?

Germany’s economy is still recovering from the pandemic and probably won’t reach the pre-crisis level before mid-2022. The recovery this year should be quick, but it could become more difficult in the years ahead as German companies are struggling with the green and digital transformations.