I wouldn't say that it's all about the amount of money available. I'm almost more driven by the question of how do we spend the dollars we have. That's a very hard task and I so hope that the next government will be ready for it. Germany's headed for snap elections on February 23rd at the heart of the discontent, the economy.
Joining me now is Ulrike Malmendier from the German Council of Economic Experts. Thank you for joining us. You're welcome.
How do you see fresh elections? breathing some life into the German economy if they can. Yeah, there is that potential.
I'm hoping for that potential. But there is also a flip side. So let me explain.
One of the big factors that has affected the German economy is uncertainty. We have seen it both on the side of firms who are not investing, who are not sure whether to build up capacity if there is demand, and who keep citing uncertainty. Economic uncertainty, policy uncertainty. The same on the consumer side. The consumers have had a gain in income and are still not spending.
So if we can reduce that uncertainty, that would be good. However, I would say we have to wait for the election results and the new coalition. to see whether we have a better alignment among the party running this country.
The council has released some strong medicine for what's ailing the German economy. One of those things is more public investment, saying that there hasn't been been enough public investment. Tell us more about what kind of public investment could be needed.
Yeah. So in Germany, we've had this big debate about the debt quota. We have the famous debt break, which prevents the current government from borrowing more. The point of that debt break was to say, well, if we keep increasing how much we are borrowing, that will be at the detriment of future generations. We have to think about the future.
Now, what we are pointing out is that The effect can sometimes go in the opposite direction because with the little money we have left we might spend it on the things we have to cover, the holes we have to fill and not think about the future, not think in particular to answer your questions about three areas we see huge deficit. deficits in public transport, the infrastructure of public transport. We see obviously a deficit in terms of defence spending, having modern defence capacities. And then the third one we emphasise in this year's report is education. It's both the schools, the buildings, but also investment in the actual education, in particular at early stages of a child's education.
And so we want to find ways to institutionalize, to make it more binding that those can't be neglected. So a recent survey of economists by the IFO Institute for Economic Research found that only about half of economists want to reform the debt break. Germany has also only just gotten inflation under control.
Wouldn't it be a little bit irresponsible? to potentially go into more debt at this time. Yeah, so indeed, with this new proposal, we are actually not saying borrow more. We don't want to increase the fiscal space.
And the emphasis is quite the contrary. We want to, what we are saying this year is whatever fiscal financial capacity you have, think about how you're spending the money. We do think that a light reform of the debt break would be useful.
We want to make it economically smarter, but indeed the council also- to think that something along those lines, some guardrails along those lines have actually been useful. Europe's economic challenges are long right now, from cutting carbon to funding industrial subsidies to supporting pensions for an aging population. But none of this, which is easily affordable.
On top of that, we've seen the re-election of Mr. Trump in the United States, just as Europe's ability to finance, this long list of demands has weakened. Is this list of woes simply insurmountable? I hope not. And we will do our best to contribute to helping overcome it.
One important response to Donald Trump being reelected would be that as Europeans, as European countries, we get together and become closer. We utilize the fact that within Europe, there won't be a trade war. There won't be the...
this kind of tactic and strategizing where one tries to win over the other. So let's take advantage of the original idea of the European Union and lower the barriers for trade, for capital market union, all these ideas we have kept talking about for years and years. But then they always stumbled in terms of implementation because of national interest.
Every country wants their insolvency law to be the one that's being used. Now is the moment where we don't have time for that. We just. need to use this crisis to overcome these hurdles and grow together and become one big economic power that can stand up to the US, also to China and Russia, as we are seeing more polarization in the world. Germany's economy has been flagged.
It's particularly stark when you look at the top five economies in the world. What does a Trump 2.0 administration mean for the German economy, which is projected to be in recession again this year? Yeah. So in the past, Germany's economy has really benefited from exports.
We were an export strong nation, much to the dislike of Mr. Trump. Well, I guess it's good news for him that our export is currently not as strong. as we would like it to be.
We do hope that we will gain competitiveness again going forward. However, we have to be particularly careful towards the US as we have observed that what has been hampering our export has been China to a large extent. China is a true competitor and is also demanding less of our export goods as they're producing themselves now.
So beyond Europe, U.S. has, if anything, gained in importance as a market for us. And so that is indeed aggravating the problem. Now, as far as the European companies and the German companies are concerned, when they hear Trump say, well, you know, I want you to produce in the U.S. for the U.S. They're kind of ready to do that. The automobile companies are already doing that.
I assume they can just kind of ramp up their production there. That's what they're announcing. That's not, of course, what's helpful for German production and German GDP.
So I do hope that we will come to an agreement. I will say that all this talking at the campaign rallies about tariffs being his favorite word and he wants to impose tariffs right and left. I still want to see what actually happens because what Trump has also seen is that inflation was a winning issue for him. He has won largely on inflation, on people struggling to pay for their groceries, being upset about those prices.
If you raise tariffs, That's a guaranteed way to further increase inflation. So maybe we'll find a middle ground where we don't go quite as extreme. The IFO Institute has also called for Germany to prepare for a Trump presidency. They cited, similar to what you've been saying, a more unified EU services market. But they also said that there should be, quote, credible retaliatory measures against the U.S.
But with the German economy in the position it's in now, does Germany have the economic heft for any kind of countermeasures that could stand up to the U.S.? Yeah. So, again, I would not want to emphasize what Germany alone can or cannot do. I would think it has to be in cooperation with the other Europeans. As such, we are a veritable economic power.
And so hopefully we can speak in one voice. Now, as far as retaliatory measures are concerned, I very much hope that we do not have to go down that route, that instead focusing all our energy and our money on becoming more competitive and becoming country where in terms of infrastructure. political environment, it is actually a good place for companies to work and where we work really hard to make labor costs, the big issue in Germany in particular, cheaper by being open to immigration of workers, by integrating people better into the labor markets, including people who are already retired, women, exploiting all these margins we have. I think that's the marginal dollar or the marginal time spent.
well rather than focusing on retaliatory measures. You mentioned labor problems. This reminds me of the structural challenges that have been facing Germany for a long time.
And recently I was reading a report that was dated from 2013 by the OECD. They were already talking about immigration problems then. So this leads me to ask, why is Germany so slow to tackle these kinds of issues and how can these structural challenges be tackled? Yeah.
I don't quite know why we are so slow. I would completely agree the writing has been on the wall even before 2013. I mean if there's one type of economically relevant development that's well predictable, it's demography. And so I would say 30 years ago we could predict already that this is like not going in the direction in which...
We were anticipating it would go when we designed our social security system, when we designed our labor markets. And so more openness to immigration, to attracting people from abroad is what is urgently needed. I would say Germany has improved over the past years. However, the big source of immigration, of more labor force entering, have been other European countries.
Now, these have somewhat similar issues right now in terms of their demographic development, maybe not quite as rapidly. as Germany, but the aging, over-aging is happening there as well. So we have to branch out, we have to find corporations in those countries which may have the opposite problem, like India, the government recently visited there for an extended trip, and I hope we will speed up now. This is no excuse for these measures not happening earlier, but that's how policy often is. Our role as a council also in this year's report is to emphasize we have to keep thinking about the long run, hence our discussion about future-oriented long-run investment also from the public side.
But the daily business of politics unfortunately often under-emphasizes it. You mentioned also pension system. A security system like a system like we have right now won't work with an aging society. Somebody has to address that and there's just so much resistance.
among politicians to be the one, to be the black sheep who has to put it into place. Snap elections have been called for three months from now. The two leading parties at the moment are both rightward-leaning parties, the CDU-CSU and then the alternative for Germany in second place.
This makes me wonder how much appetite is there for some of the hard medicine for these structural problems. Neither of these parties are very in favor of more immigration, for example, and they're both in favor of keeping the debt break as is. So... Is the current political environment going to allow the structural problems to be tackled?
Yeah, I mean, there are two types of hard medicine. One type goes more in the direction of how do I set more incentives to work, which might include, according to what these parties are saying, maybe lowering social benefits if you don't have work. So there's... some kind of incentivization, maybe possibly larger participation in the labor market coming from that type of hard medicine. I hope it would be implemented wisely by thinking smartly about how to adjust marginal incentives by going from...
one system to the other. That was last year's report. But then the second type is that the CDU for sure is thinking a lot about how to make our industry more competitive without only going in the direction of subsidization.
So I think that is part of hard medicine. In terms of the flip side, in terms of needing more labor, I would agree that we can't fill the gap with a complete focus on what we can do domestically, even if we can. We get all the women to participate full time in the labor market.
We get all the retired people who are able to participate. We have more needs. So we do need to remain open towards immigration. And that will be a hard balance to strike.
Mr. Trump won beyond winning on the inflation platform. He won on the immigration or anti-immigration platform, on mass deportation platform. So there is this worry. There is this resentment building up in the population in the U.S.
I think there are some parallel trends here that has to be taken. taken seriously without polarizing, without becoming xenophobic. That's a very hard task and I so hope that the next government will be ready for it.
We've spoken a lot about the debt break. It was passed in 2009. Is it to blame for Germany underspending on its future? Well, in today's, in this year's annual report, we are claiming that this story is too simple.
So you might say, like, well, we don't have enough fiscal space, so we don't invest enough. Here we go down the drain. I would agree that some of the rules are too strict, hence I'm in favor for a smart, economically smart reform of it. But I'm almost more driven by the question of how do we spend the dollars we have? Do we always fill in?
gaps, holes, which we find right now, for example, due to a retirement system that can't survive in the long run, instead of doing the hard task of reforming it and having more capital market-based accounts for each person saving for retirement. So I wouldn't say that it's all about the amount of money available, but it is also in terms of future-oriented investment. If we had invested more in our infrastructure, one of our big selling points was the traffic infrastructure, the intermodal leave. like both on the trains and the streets, that would be better for Germany, for German production. If we had invested more into education, we might have people who are able to jump into more productive jobs right now.
And of course, with Trump's election, we also now suddenly realize we need to be ready to stand up for ourselves in terms of defense, rather than having to ramp this up like crazy in a moment of recession and stagnation. It would have been great to more slowly build this up. So fostering a more long-term perspective, getting out of this myopia is for me the bigger emphasis right now.
Ulrike Malmendier from the German Council of Economic Experts, thank you for joining DW Business. You're very welcome.