Germany on the Verge of Structural Change

Public Events

Christoph M. Schmidt Presenting the German Council of Economic Experts’ Annual Report at ZEW

We are on the verge of a new decade, bringing with it major structural changes such as demographic change, digitalisation, and climate change, which the economy, politics, and society will have to cope with in equal measure in the coming years – all while the economy and world trade are weakening. There are, however, ways to tackle these challenges. How this is to be done was outlined by the chairman of the German Council of Economic Experts and President of the RWI – Leibniz Institute for Economic Research, Professor Christoph M. Schmidt, at ZEW Mannheim.

As part of the lecture series “First-Hand Information on Economic Policy”, Professor Schmidt presented the key results of the latest Annual Report 2019/20 of the German Council of Economic Experts on 5 December 2019. The Council’s function is to provide well-funded advice to politics and society based on its critical observations, Schmidt emphasised. In front of an audience of approximately 180 guests from the worlds of business, science, and society, Professor Schmidt explained which options Germany currently has to mitigate undesirable developments or, at best, prevent them altogether.

“The growth rate of the global economy has slowed, world trade is very weak,” Schmidt said, opening his lecture. “This is particularly disadvantageous for an open economy – and no other economy is as dependent on open markets as we are.” Germany’s real gross domestic product (GDP) is expected to grow relatively weakly by 0.5 per cent this year. Schmidt and his fellow Council members expect real GDP growth of 0.9 per cent in Germany for 2020 – albeit including the higher number of working days. The German economy is also expected to grow by only 0.5 per cent next year – “calendar-adjusted,” as the annual report named it. For the eurozone, the Council expects real GDP to weaken by 1.2 per cent this year and by 1.1 per cent next year.

Between cyclical downturn and structural changes

According to the analyses, it is mainly the industrial sector that is currently weakening – “and this is happening across countries caused by a hardly distinguishable mix of cyclical downturn and structural changes,” Schmidt stressed. There is also “a considerable element of uncertainty” feeding primarily on international trade conflicts, seemingly never-ending Brexit negotiations, and pending regulations, e.g. in climate policy. A broad, deeper recession, however, is not to be expected.

And the further easing of monetary policy by the European Central Bank was “not a good idea,” according to Schmidt. The ECB’s expansionary course unnecessarily limits the room for manoeuvre needed in a stronger downturn phase. The federal government’s fiscal policy will also be just as expansionary in the coming period, as major expenditure on climate policy will have a considerable effect on the budget. In the opinion of the Council, it would, however, be sufficient to “let automatic stabilisers do the job,” said Schmidt.

In terms of structural changes, demographic change will be a major cost factor in the coming decade when a large cohort of baby boomers will leave the labour market, while at the same time the situation on the market becomes increasingly aggravated by new technological developments. “All highly developed economies have been experiencing weak productivity growth since the 1970s,” Schmidt added. According to Schmidt, under whose chairmanship the Council has produced seven annual reports so far, structural change can be mastered if policymakers define a well-structured five-point plan.

These points consist of (1) the not only efficient, but above all rapid allocation of existing resources, (2) the promotion of research and innovation through non-discriminatory, transparent and evaluated economic and industrial policy, (3) the exploitation of untapped potential in the labour market, e.g. through the greater inclusion of women and elderly people in the labour market, immigration, training, further education, and greater equality of opportunity, (4) an increase in private and public investment as well as (5) a more coordinated approach on the international level, especially in climate policy.

“Innovation policy must be open to new technology”

“Germany is heavily dependent on the international trading environment remaining liberal,” Schmidt said. To this end, the Federal Republic cannot afford to rely on national solo efforts; boosting industrial policy must at the same time mean boosting innovation policy – “and innovation policy must be open to new technology,” according to Schmidt. This could be achieved by generating more venture capital for young companies through tax incentives, and by further promoting capital market integration in Europe.

In the subsequent debate with ZEW President Professor Achim Wambach, the points presented by Schmidt were discussed in greater detail. Is it still necessary for Germany to have its own “debt brake” if there is already a solution in place at the EU level? Should the federal government help municipalities reduce their debts in order to create scope for high investment needs at the municipal level? And is the demand for an innovation policy that is open to new technology sufficient if shortcomings in traditional industries are yet to be mitigated?

The audience at ZEW was primarily interested in the topic of climate policy. The question arose as to whether Germany will indeed succeed in phasing out nuclear power and coal, while the switch to renewable energy might fail in the face of an apparently insufficient climate package. Professor Schmidt answered, referring to a special report by the Council of Economic Experts which addresses this very issue. “The next step in climate policy must be to establish a uniform European and international CO2 price,” said Schmidt, emphasising that politics and society still have a lot of work to do.

The lecture series “First-Hand Information on Economic Policy” is regularly supported by the ZEW Sponsors’ Association for Science and Practice, which – following the lecture – awarded two science prizes to outstanding research and economic policy advisory projects by ZEW researchers for the second year in a row.

Additional information