After Merkel: Is Germany at the End of a Cycle?

Angela Merkel's departure in September 2021 marks a political, economic, and geopolitical turning point. To understand how Germany is preparing for the post-Merkel era, Head of our Germany Program Alexandre Robinet-Borgomano and Senior Reporter Marion Van Renterghem have launched a series. In this second episode, we asked three questions to Clemens Fuest, President of the Ifo Institute, on Germany’s leadership, competitiveness and prosperity. 

What reforms do you think Germany currently needs in order to achieve the right balance between competitiveness and a better distribution of wealth?

The evolution of income distribution is a major issue for Germany today and will remain one in the future, but this should not undermine growth and competitiveness. It is likely that the gap between the income and employment prospects of the highly skilled and the less skilled will continue to grow in the years to come. The pandemic only served to exacerbate this trend. 

In fact, the Covid-19 crisis has accelerated structural change, digitalization, and the decarbonization of our societies. At the same time, the pandemic has aggravated the situation for people from less educated backgrounds, who were already disadvantaged in the past. Two types of reforms can mitigate this negative trend: 

• reforms that increase economic growth by targeting the pre-market phase, such as greater investment in education;
• reforms related to classical redistribution including income tax, wealth tax or the reintroduction of the network tax.

We should focus on the first type of reforms to promote more equality and avoid reforms that create a systematic conflict between distributional goals and economic growth. Germany is now surrounded by countries that do not have a wealth tax. If it was to introduce such a tax right now, it would send a very negative signal for investments. This would probably lead to a capital flight.

Germany has long been criticized for letting the interests of its industry determine its foreign policy. How does Germany view the future of its relationship with China?

I don't think that the Merkel government has been particularly industry-friendly. There is an awareness in Germany that prosperity is based on our ability to export because we have specialized in industrial products and services. We know from experience that recovery from a crisis often depends on exports.

China is indeed a very important partner, perhaps too important today. But experience so far shows that German export companies have been very flexible in finding new markets.