Reint Gropp is President of the Leibniz Institute for Economic Research in Halle. In the interview he classifies the latest economic data and explains what he believes is missing in the new industrial strategy.
Mr. Gropp, the German economy shrank again in the third quarter – albeit only by just 0.1 percent. How alarming should such numbers be?
Individual data should never concern us greatly. Especially not against the background of long-term transformation. Short-term data like Q3 economic performance is at best a small warning sign that we have some structural problems. We definitely have that, otherwise other industrialized countries would have very similar numbers. But unlike us, they grow.
Why are we so much worse off than our European neighbors or the USA when the challenges are fundamentally similar?
There are several reasons for this. First and foremost, of course, the energy strategy, the switch from Russian gas to other energy suppliers and renewable forms. That’s why France is in a better position with its nuclear program and the USA with its fracking program. And that plays directly into consumption, which accounts for almost 70 percent of Germany’s gross domestic product. When energy prices are high, people can afford less. If people don’t consume, the economy will initially shrink – until higher wages are implemented at some point. However, we will experience a certain catch-up effect here in the coming months.
This is exactly how the Ifo Institute sees it, which expects slight growth for the fourth quarter. Mainly due to increasing purchasing power. Would you sign?
Yes. We have relatively long-term wage agreements in Germany, which is good in terms of planning security. However, if inflation rises surprisingly sharply, there will be a temporary loss of purchasing power. At some point, however, wages adjusted to the new price level. We are now experiencing this catch-up effect.
In addition to increased wages, purchasing power is recovering due to falling energy prices. That all sounds very rosy.
Yes, but we can’t want that in the long term. Our goal is climate neutrality by 2045. And if we really want that, we need higher energy prices.
I’m sorry, what?
On the one hand, higher energy prices mean that we use less energy. And secondly, they provide companies with incentives to develop more efficient processes.
That’s the economist speaking. But do you think that could be translated into real politics? There has recently been massive resistance to the Building Energy Act.
Nobody wants to do that. I also prefer to pay less for my energy. That’s why the whole thing has to be meaningfully flanked and communicated. Low-income earners must receive net relief in these packages. And those who want to continue relying on fossil energy have to pay more. When prices rise, good companies think very carefully about whether they want to change their production. We can then support this change with subsidies.
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That sounds a bit like the idea of climate money: the income from CO2 prices is paid out equally to everyone and CO2-intensive products are made more expensive. Those who consume fewer of these goods benefit and large consumers pay more. Good idea?
Yes, you can do all of that. The central element of every strategy is simple and must be: Anyone who produces CO2 has to pay more for it. There’s no way around it.
But that would initially mean massive cost increases for private households and companies.
Yes, until at some point we get our energy entirely from renewable energies. By then we would have rising energy prices, and we shouldn’t prevent them – but, as I said, accompanied by relief measures.
Robert Habeck presented his new industrial strategy last week. There, too, there was a lot of talk about energy prices – but he wants to lower them. So the strategy didn’t convince you?
Basically, the three challenges were correctly diagnosed there. We have geopolitical problems, a shortage of skilled workers and the transformation to climate neutrality. But I believe that too much importance is given to the industry. Purely in terms of numbers, it only represents 20 percent of gross domestic product. Since 1991, three million industrial jobs have been lost, but at the same time ten million jobs have been created in other sectors – especially in the service sector. This shows how massive the transformation is, but also how well it works. And that’s why I think it’s the wrong approach when the federal government says it wants to reverse the trend. To do this, I would approach the individual challenges differently.
What are you thinking about?
My main concern is the active funding policy to improve the local conditions. If he means that we should promote research and development, then everyone would probably agree. But if he thinks that individual factories and individual sectors should be subsidized in order to establish chip factories like Intel’s, then I think that’s a very bad idea.
What do you suggest instead?
Two things: On the one hand, we have to improve the framework conditions. And we would have enough to do with that. Just with the reduction in bureaucracy. We’ve been saying this for decades, but despite some improvements, the bottom line is that things are getting worse. The problem is the self-image of many civil servants. To put it in economic terms: the well-being of companies is not part of the civil servants’ utility function. They don’t care if any business has to close because of some rule. And this understanding is completely different in other countries like Switzerland. If I want to build a factory building there, the head of the building department will help me. And this extends to many other areas.
We have to focus on Europe and our allies – that is, form a global community of values with democracies like the USA, Japan or South Korea. This leads to a much more pragmatic policy than the island of the EU, which is surrounded by enemies.
However, the energy and raw materials required rarely come from democracies.
Right, that’s why we have to diversify. Whether these are countries in Africa, South America or Asia: all may be politically unstable in their own right. But we must never again become dependent on Russian gas – and not on any important raw material.
This would make preliminary products significantly more expensive. For many companies, production in Germany could no longer be profitable.
Yes, the much-quoted chemical company. Two things are important here: On the one hand, it must be made clear to the chemical industry that there is no subsidized electricity price. Then she can consider whether she no longer wants to manufacture certain products in Germany. Secondly, this only makes sense if you combine it with European climate goals. For example, if we introduce climate tariffs, then it doesn’t matter where the CO2 is emitted. The price would be indifferent with production in Europe. I assume that many companies would prefer to produce in a stable environment like Europe – or rather make their production greener. In the end, we would be more competitive.
This interview first appeared, which, like stern, belongs to RTL Deutschland.