Ifo President assesses election′s economic consequences | Business| Economy and finance news from a German perspective | DW | 25.09.2017
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Ifo President assesses election's economic consequences

An unstable government would be bad for Germany’s standing as a business location, says the head of Munich's Ifo Institute. In addition, the success of the AfD could exacerbate the economic problems in eastern Germany.

DW: Mr Fuest, Germany has voted and with a very surprising outcome: substantial losses for the so-called major parties CDU and SPD, the return of the FDP to the German Bundestag and above all else, the strong performance of the AfD. What does all of this mean for Germany's status as a business location?

Clemens Fuest: In my view, the grand coalition has been rejected. This has advantages and disadvantages for the economy. The grand coalition represented stability and predictability. Now there is some uncertainty, a sense reinforced by the entry of the AfD into the Bundestag. However, I think the significance of their emergence should not be exaggerated. They won 13 percent and it is possible that as a result, the parliament will have more of a nationalist tone. But the significance should not be exaggerated, either.

Now there is the possibility of a so-called 'Jamaica coalition' between the CDU, the FDP and the Greens. Would such a constellation be good for the German economy? The three parties are quite far apart on some important issues, for example in the areas of energy policy and transport policy. What do you think?

I see the potential for such a constellation to make progress in areas of economic policy but also to avoid making certain mistakes, such as were made by the grand coalition. One example would be the rental cap, where it was imagined that you could solve the housing problem and help poorer people find affordable housing by introducing maximum limits for rents. Such mistakes can be avoided.

Clemens Fuest

Ifo President Clemens Fuest warns of election's economic consequences

There is a risk of course that finding consensus will prove difficult and that the government could become unstable as a result. If things become too unpredictable, this would be very bad for the economy. It is therefore very important that differences can be overcome in negotiations so as to form a reliable coalition.

What are the main tasks facing the new government? What would you advise them to focus on?

An absolutely key question is how to prepare the German economy, and indeed the whole German society, for the challenges of digitization, automation and globalization and how to ensure that Germany remains a powerful business location into the future. I foresee major challenges in terms of training and upskilling systems. Put simply, we need people to know and understand the new working world.

Then I see the challenge of digitizing the public sector and public administration. On the other hand, I think that the issue around digital infrastructure is exaggerated in Germany. Fiber glass will not solve all our problems and it is inefficient. We must make sure that we are not interfering with new business models purely out of fear of companies such as Uber and AirBnB. Of course one must fight abuse, but you also have to create space for new business models. To summarize, digitalization is a major task facing the government.

The other big area is Europe. We need to stabilize and strengthen the Eurozone. There are challenges in the pension system and we will not solve our demographic problems by handing out gifts at the expense of the younger generation. These are the main issues that a new government must tackle.

Back to the AfD. You suggested it may not be so damaging to hear some sharper, more nationalistic tones in the Bundestag. But isn't there the chance that some of what we have already heard from the AfD could put off investors?

Rather than the mere presence of the AfD, what would put off investors is if there are xenophobic riots or protests, such as those conducted by Pegida in eastern Germany. From an international perspective, this would be seen as connected to the presence of the AfD. I don't think investors will be put off Germany as a whole, but they may be more inclined to go to regions other than eastern Germany. That means that the economic problems in eastern Germany will be exacerbated by xenophobia and populism, rather than being overcome.

Clemens Fuest is a professor of economics at the Ludwig-Maximilians-University of Munich, as well as being a member of the Scientific Advisory Board at the Federal Ministry of Finance. Since April 1, 2016, Fuest has been the President of the Ifo Institute in Munich. He previously headed the Center for European Economics in Mannheim (ZEW).