AI, Cloud Computing, and Blockchain – Where Does the German Economy Stand?

Digital technologies are not only changing the efficiency and flow of production processes. They are also having a profound, disruptive impact on our economy in a process often called “digital transformation.” This digital transformation refers to the integration of digital technologies into economic workflows, as well as their impact on living conditions and society as a whole.
The numerous new technologies that have seen considerable progress and widespread acceptance in recent years include digital platforms, the Internet of Things (IoT), robotics, cloud computing, blockchain, and, last but not least, artificial intelligence. 

Their wide-ranging application and far-reaching dissemination are giving rise to innovative products, services, and business models that are used in a variety of industries, from logistics and energy to agriculture, trade, telecommunications, financial services, manufacturing, and healthcare. They even have the potential to change people’s lives and society in the long term.
All three technologies have the capacity to significantly change existing business models and the way in which knowledge, products, and services are created and exchanged.

ChatGPT Brings AI to the Center of Society

AI-based systems use techniques such as machine learning and deep learning to automate complex tasks such as pattern recognition, language processing, trend analysis, and decision-making with the help of large amounts of data. Increased computing power, the availability of large amounts of data, and new algorithms have led to the rapid development of AI technology and enabled its broad application across all economic sectors. Most recently, the spread of chatbot applications, such as OpenAI’s ChatGPT, has brought AI to the forefront of public interest.

AI in Companies: HR Managers Have Concerns about Its Use

Fully 86 percent of German HR managers have concerns about the use of artificial intelligence (AI) in their company. This is according to the latest Randstad-ifo Personnel Manager Survey. The most common reason given by HR managers was a lack of expertise (62 percent). Legal aspects are an issue for 48 percent. A lack of trust in AI was cited by 34 percent. For one-quarter of HR managers, a lack of acceptance is an obstacle to the use of AI. For 22 percent, no added value is evident from AI. The high cost of AI is viewed critically by 19 percent, high costs by 18 percent.

AI Takes Center Stage at the Munich Economic Debates (MED) 2024

At the Munich Economic Debates (MED), we continuously explore the profound impact and burgeoning potential of artificial intelligence (AI) across various sectors. Throughout the year, we bring together leading experts from academia, industry, and society to delve into the vast opportunities and challenges presented by this transformative technology. To stay updated on event schedules and access livestreams, visit our ifo website. We invite you to join the conversation and help shape the dialogue about AI’s role in shaping our future.

Events

Impulse

The Road to Brexit: A Closer Look

Brexit promised better control over immigration, an end to payments to the EU, and full sovereignty for the UK. Conversely, there were warnings that leaving the single market could jeopardize the economic stability of the island. Politicians from various camps engaged in heated debates – in parliament, newspapers, talk shows, and on social media. The sentiment for Brexit was already noticeable in 2014 when Prime Minister David Cameron announced his intention to renegotiate the UK’s treaties with the European Union. Following the Conservative Party’s election victory under Cameron in 2015, the Brexit referendum was scheduled for 2016. Cameron also negotiated further special arrangements for the UK in the EU, contingent on the vote against Brexit.

The United Kingdom Divided

The Brexit referendum results laid bare the deep divisions within the United Kingdom. In England and Wales, the majority voted in favor of Brexit; however, in Northern Ireland and Scotland, as well as among London’s electorate, the majority voted to remain in the EU. The divisions were not only regional but also generational. A significantly larger proportion of young Britons voted to stay in the European Community compared to their older counterparts. In November 2018, Theresa May, David Cameron’s successor, reached a provisional withdrawal agreement with the EU. The final exit, initially planned for March 29, 2019, was postponed to April 12 and ultimately to October 31. The complexity and lengthiness of the negotiations between the parties proved too great.

The Protracted Conclusion

Facing heavy criticism from the public and her own party, Theresa May announced her resignation in the summer of 2019. Her successor, Boris Johnson, braced the nation for a hard Brexit with no agreements in place. However, after the British parliament passed a law against a no-deal Brexit, the EU postponed the exit date once again to January 31, 2020, when it finally occurred. A trade agreement, which also included a free trade deal, was still absent. After lengthy negotiations, it came into force on January 1, 2021. While bilateral trade now enjoys exemption from customs duties, UK exports are subjected to extensive customs formalities. Further cooperation agreements were signed in areas such as crime fighting, climate policy, and energy supply, ensuring that collaboration in critical areas continued and the UK was not completely severed from the EU.

Economic Consequences of Brexit

As opponents of Brexit predicted, the negative economic consequences have been less severe for EU countries than for the UK. By 2021, the UK had fallen from being Germany’s third most important trading partner in 2015 to tenth place. In 2022, the ifo Institute updated its initial study on Brexit’s consequences from 2017. Key findings include:

•    Since the Brexit referendum on June 23, 2016, the British pound has depreciated by around 13%.
•    German exports of goods to the UK have dropped in nominal terms from 90 billion euros to 84 billion euros since 2016.
•    In many sectors, the UK’s share of German imports and exports has decreased significantly, particularly in chemicals, vehicles, paper, and mineral products.
•    The impact varies among EU member states, with economic size, geographical, and cultural proximity playing significant roles – the closer a country is to the UK, the greater its losses.

Despite the EU and Germany experiencing fewer economic losses from Brexit than the UK itself, the consequences are serious. Both sides are suffering from the uncertainty surrounding the future development of economic relations.

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Merging Economic Landscapes

The Berlin Wall’s fall in 1989 paved the way for the State Treaty on Economic, Monetary, and Social Union in July 1990, heralding the economic merger of Germany. The Deutsche Mark became the national currency across both East and West Germany, extending the social market economy’s principles to the newly incorporated federal states. This transition placed immense pressure on East German enterprises to adapt quickly. The Treuhandanstalt, a public agency tasked with privatizing over 12,000 state-owned businesses, failed to find buyers for about 3,000, leading to their closure. To stave off an economic downturn, the federal government launched the “Gemeinschaftswerk Aufschwung Ost” (Joint Initiative for East Germany) in 1991, introducing the solidarity surcharge among other tax increases to fund this support.

Economic Progress Since 1989

By the late ’80s, East Germany’s economy lagged in competitiveness. The conversion rate between the GDR Mark and the Deutsche Mark was unfavorably high. Overnight, West German laws took effect in the East, further straining its struggling economy. “Looking at East Germany’s economic trajectory from the initial years post-reunification, the strides made are impressive,” notes Joachim Ragnitz, Deputy Director of the ifo Institute’s Dresden branch. Following reunification, East Germany saw a significant population decline due to lower birth rates and mass emigration, reducing the population by over 2 million since 1991 and those of working-age by more than 10 percent.
Yet, by the end of 2023, unemployment had drastically fallen from highs of around 20 percent to just 7.1 percent, after having averaged 7.6 percent in 2018. Economic output, risen by 127 percent, real disposable income, risen by 62 percent, and job numbers per working-age individual had seen substantial increases by 2018.
 

Comparison with the West 

Residents of the eastern states often measured their progress against the West, feeling dissatisfied despite considerable advancements. Economic output and wages in the East only reached about 80 percent of the West’s average, with disposable income just catching up to the levels of Bremen and Saarland.
“Public perception of wage disparities fuels discontent,” Ragnitz explains. In 2018, the median wages for full-time workers in the East were 79 percent of those in the West, partly due to structural differences, such as a higher percentage of workers in low-wage sectors, 38.1 percent in the West and 42.9 percent in the East, and a scarcity of large corporations in the East, affecting overall wage averages. 

Addressing Structural Shortfalls

Three decades post-reunification, East Germany had only managed to match West Germany’s economic output from the mid-80s. Persistent structural challenges – like fewer large firms, limited headquarters presence, a shortage of skilled professionals, and reduced research and development activities – continued to impede the East’s growth. “Considering these challenges... it’s notable that the East has managed to keep pace with the West’s economic growth in recent years at all and not falling further back,” Ragnitz points out. He suggests that the general sentiment might be gloomier than the actual circumstances, advising politicians to navigate beyond perceived public moods.

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Fleeing from Dictatorship and Terror

The war in Syria was the main cause of the large flow of refugees in 2015. Most of the populace simultaneously faced existential threats from two sides, as the terrorist organization Islamic State grew in strength Syria and Iraq in 2014 and the Syrian President Bashar al-Assad sought to maintain his draconian rule. Fleeing from Syria to Turkey and from there to the Greek island of Lesbos seemed to be the last resort for many people who feared for their lives. The Greek authorities refrained from registering the refugees in an orderly manner and channeled the flows to Hungary and Austria through the Western Balkans.

The Background

Between 2003 and 2013, around 34,000 people a year applied for political asylum in Germany. That figure was 173,000 in 2014 but soared to 800,000 in 2015. Most of them came from Syria, Iraq and Afghanistan. Initially, their escape route took them through the Balkans, in other words, via Greece, North Macedonia, Serbia and Hungary to Austria. By mid-2015, around 150,000 people had reached Hungary and were accommodated in camps there. Hungary’s Prime Minister Viktor Orbán ordered the borders to Serbia to be closed in June. In addition, television pictures flashed around the world showing the harsh treatment meted out by the Hungarian police to refugees. In view of these events, the Federal Office for Migration and Refugees decided to allow people from Syria to enter Germany – even if they had not registered in another EU country.

Germany as a Safe Haven

The upshot was that many refugees no longer wanted to register in Hungary at all, but instead tried to travel directly to Germany. Riots broke out in some camps. In Burgenland, a truck was found containing more than 71 refugees who had suffocated after apparently being packed inside by smuggling rings and abandoned. The picture of the young Alan Kurdi also provoked outrage. The child drowned during the onward journey from Turkey to Greece. Angela Merkel’s decision to help those affected as quickly and comprehensively as possible should also be understood in light of the enormous pressure from the media.

Since 1949: The Fundamental Right to Asylum

The right to political asylum in Germany is governed by Article 16 of the Basic Law. In paragraph 1, it states: “Persons persecuted on political grounds shall have the right of asylum.” And paragraph 2 reads: “Paragraph (1) of this Article may not be invoked by a person who enters the federal territory from a member state of the European Communities or from another third state in which application of the Convention Relating to the Status of Refugees and of the Convention for the Protection of Human Rights and Fundamental Freedoms is assured.” That prompted critics of unrestricted admission of refugees to ask who was regarded as politically persecuted and why those coming from safe third countries such as Hungary and Austria should also enjoy a fundamental right to asylum.

The historical background to the right to political asylum being enshrined in the Basic Law was the expulsion of German Jews during the National Socialist regime. These refugees often had great difficulty obtaining political asylum in other countries, such as Switzerland.

What is the Situation 10 Years On?

Around 55 percent of refugees who came to Germany in 2015 are now in employment. Integration into the labor market appears to be working and that percentage is expected to increase significantly in the coming years. The economist Jan Kluge pointed out the importance of integration back in 2015 in a publication by the ifo Institute. The considerable increase in immigration would counteract population decline in Germany, but the positive effects on the business location

could only be achieved through comprehensive integration into the labor market. Immigration and the successes and problems of integration will continue to spark a passionate political debate in the coming years, including in other EU countries. Some observers see the events of 2015 as the basis for the growing success of right-wing populist parties such as the AfD.

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The “Schreiber Plan”

A study by the Federal Statistical Office, commissioned by the Federal Ministry of the Interior on the social conditions of pensioners and benefit recipients, catalyzed the push for significant reform. With the average net pension at 62.90 Deutsche Mark – merely a third of an average wage and below the subsistence level – an increase in social benefits was deemed urgent.
Wilfrid Schreiber, a pre-war writer and journalist, proposed a reform plan. Despite his controversial past, including membership in the NSDAP and involvement in wartime propaganda, the Association of Catholic Entrepreneurs (BKU) hired him as a consultant, and he also taught courses in economic theory, social policy, and statistics at the University of Bonn.

The Reform Draft

Schreiber’s reform proposal envisioned a unified mandatory statutory insurance to replace the separate schemes for disability, employee, and miner’s pensions. Crucially, it proposed replacing the existing funded system with a novel pay-as-you-go method. This so-called generational contract required each working individual to pay a certain percentage of their gross income into the pension fund, from which current pension payments would be made. Additionally, Schreiber suggested redefining how pensions were calculated. He developed a formula that was linked, among other things, to general wage developments. This principle of dynamic pensions was intended to bring about a significant increase in social benefits.

Intense Discussions and Historic Approval

The journey towards the enactment of the 1957 pension reform was marked by profound and, at times, heated debates, earning its place in history as the “pension battle.” In the Bundestag, Germany’s federal parliament, the debates reached their zenith. Members of the Social Policy Committee had already laid the groundwork with spirited discussions, but it was during the bill’s second reading that parliamentarians truly delved into the heart of the matter. For four days, a marathon of speeches unfolded, with parliament dissecting and debating hundreds of paragraphs and amendments. In the end, the Bundestag cast its votes on January 21, 1957, and the reform was approved by a substantial majority.
Konrad Adenauer, the Chancellor, had been a driving force behind the reform, strategically aligning its passage with an eye towards the upcoming Bundestag elections. The first payments under the new system were made in April 1957, setting the stage for a significant electoral victory for the CDU/CSU in the September 1957 Bundestag elections, where they achieved an absolute majority.

Ifo’s contribution to the pension debate

In the lead-up to the pivotal pension reform of 1957, the ifo Institute made significant contributions to the shaping of the debate. In 1956, it published a comprehensive study titled “On the economic problems of dynamic social pensions”. 
The study brought to light several fundamental economic concerns associated with the forthcoming reform, which was anticipated to dramatically reshape the West German economy. It argued for minimal state intervention in the pension scheme, proposing that pension adjustments should occur automatically in line with wage and market trends. Moreover, the ifo Institute’s report emphasized the importance of individual responsibility and the need for clear incentives for personal pension planning.
By the time the reform took full effect, the level of benefits had increased by an average of 65 percent. Wages and pensions rose substantially in the years following the reform, with pensions increasing by 110.5 percent by 1969, nearly keeping pace with a 115.7 percent rise in wage levels. This alignment ensured that pensions were sufficient to cover living expenses, a marked improvement from the pre-reform era. The switch to the pay-as-you-go system also enhanced the reliability of the pension system, safeguarding it against the economic volatility that had previously eroded its value.

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Global Economic Impact

The global economic repercussions of the coronavirus outbreak were discussed at the G20 summit in Riyadh, Saudi Arabia, on February 22, 2020. There was still hope of containing the virus’ spread and that there would only be a short-lived economic slump. Yet it was already too late. The international financial markets tumbled dramatically in February. The world stood on the brink of a severe economic crisis. For the first time in its history, the ifo Institute published an interim Business Climate Index on March 19, revealing the sharpest decline in business expectations in its 70-year history. Other indicators also plunged. In the assessment of ifo President Clemens Fuest, a global economic crisis with more dramatic consequences than the 2009 financial crisis loomed. 

“It’s Serious. Take it Seriously Too!”

Angela Merkel addressed the German people with those dramatic words in a televised speech on March 18, 2020. And the calculations by the ifo Institute in February 2022 showed just how serious the pandemic’s consequences were not only for people’s lives and health, but also for prosperity. COVID caused EUR 330 billion in economic losses for Germany in 2020 and 2021, corresponding to a drop of ten percent compared to overall economic output in 2019. Before the pandemic, economic growth of 1.3 percent in each of those years had been forecast. 

Exceptional Measures

A total of 13 researchers from various disciplines – including the virologist Melanie Brinkmann, the sociologist Heinz Bude, the internist Michael Hallek, the political scientists Maximilian Mayer and Elvira Rosert, the physicists Michael Meyer-Hermann and Matthias Schneider, and the economists Clemens Fuest and Andreas Peichl – published a joint paper on combating the pandemic in January 2021. Their main goal was to significantly reduce infections while maintaining industrial production and enabling local openings through extensive testing. The plans likewise included a testing, contact tracing and isolation strategy as well as local outbreak management. Phases necessitating rigorous measures would repeatedly be superseded by one where an easing of them was allowed. The strategy was envisaged as an infection prevention concept for the whole European Union. 

Economy under Pressure

German industry in particular suffered heavy losses during the first coronavirus wave in spring 2020. That was due to the lockdowns and company closures, but also to impediments to international trade and the growing recession in countries that were important trading partners. For instance, German goods exports dropped by almost 33 percent in March and April 2020, while industrial production fell by around 25 percent.
Sectors of the economy that relied on personal contact with customers experienced a rapid slump. The ones mainly hit were brick-and-mortar retail, hospitality, arts and entertainment, and service businesses such as hairdressing salons and beauty studios. In 2020, around 3.3 million people were employed in brick-and-mortar retail, 2.4 million in hospitality, 1.3 million in arts and culture, and 0.3 million in the social service sector. 
 

Government Aid in Germany

In view of these dramatic developments, the German government adopted comprehensive aid packages. For example, the income lost by the unprecedented figure of 10.2 million short-time workers reported by the end of April 2020 was cushioned by compensation payments. The support measures for companies were able to prevent the anticipated wave of insolvencies. In contrast to the temporary and targeted aid measures, the EUR 130 billion economic stimulus package, which Finance Minister Olaf Scholz termed “Ka-Boom” when it was passed on June 3, aimed to boost future economic growth and innovations so as to ensure competitiveness. 

Pupils without School

The coronavirus crisis posed particular challenges for the education system. Surveys by the ifo Institute came to the conclusion that school closures had halved the time in which pupils were able to engage with subject matter in lessons together. Remote learning was not able to plug that gap. Moreover, the lockdown meant children spent far more time on their smartphones and computers. If they were from educationally disadvantaged families, they were particularly handicapped because they had no one at home to help them learn. Germany also had a lot of catching up to do when it came to developing digital teaching methods. In the assessment of the ifo Center for the Economics of Education, the skills not acquired during the coronavirus pandemic may have repercussions and effects on future careers and reduce lifetime earnings by around 3 percent – with the foreseeable negative impact that would have on the entire German economy. 

After the Crisis...

In April 2023, Minister of Health Karl Lauterbach announced the end of the coronavirus prevention measures, but the long-term consequences of the pandemic remain serious. According to WHO estimates, six to ten million people fell victim to it, while 65 million suffered or are still suffering from long COVID. The trend toward working from home has presented many companies with the challenge of pressing ahead even more resolutely with digitalizing their work processes. Everyday office life and interaction as part of work have to be redefined. Vacant office buildings and the upswing in e-commerce are changing the demands on urban infrastructure.  
In many areas, however, the crisis was also seen as an opportunity to instigate important structural changes that would unleash new growth potential. Development prospects in all areas, from ecological restructuring of the economy to expansion of the European single market, meant researchers were hopeful that there would be a rapid economic recovery and a consolidation of public finances. However, these hopes were dashed when Russian troops invaded Ukraine on February 24, 2022. 

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The Middle East Conflict and the Oil Embargo

On October 6, 1973, Egypt and Syria attacked Israel on the Jewish holiday of Yom Kippur. With American military aid, Israel narrowly averted defeat. International pressure from the USA, Soviet Union, and UN led to a ceasefire by late October, which was met with confusion by Arab oil states. Viewing Western support for Israel as biased, they leveraged their oil reserves to advocate for Palestinian rights.
On October 16, Gulf countries agreed to hike the price of “Arabian Light” crude oil by 70%, prompting OPEC members to follow suit. A limited supply boycott came into effect on October 17, accompanied by a 5% monthly production cut. The embargo targeted the USA and the Netherlands, with Rotterdam being a pivotal hub in European oil trade.
Oil constituted the primary energy source for Western industrial nations, with demand steadily rising. In West Germany alone, 55% of energy needs were met by imported crude oil, 75% of which came from Arab nations. The oil crisis swiftly drove up prices for heating oil and gasoline, prompting government austerity measures. Federal agencies were instructed to reduce heating and lighting usage, and a speed limit was imposed on federal vehicles. However, the public resisted reducing their mobility, and fuel consumption did not decline as expected.

The Next Steps

In early November 1973, Chancellor Willy Brandt swiftly enacted the Energy Security Act, allowing for restricted vehicle use based on location, time, route, speed, and necessity. This legislation paved the way for car-free Sundays initially planned for November and December. Additionally, speed limits of 100 km/h on highways and 80 km/h on rural roads were established, with exemptions granted to essential services such as police officers, doctors, florists, journalists, and taxi drivers.

ifo Institute Addresses Dependencies

Even before the outbreak of the Yom Kippur War in August 1973, the ifo Institute had highlighted Western industrial states’ vulnerability to oil imports and the resulting economic risks. Hildegard Harlander from the ifo Institute detailed West Germany’s dependence on oil imports and explored prospects for new energy sources in a paper. She had also extensively engaged with the Club of Rome’s 1972 study “The Limits to Growth,” advocating for energy planning that considered ecological sustainability and set energy-saving targets.

Conclusion of the Oil Wars – and the End of Germany’s Economic Miracle

By late 1973, tensions in the Middle East had eased, leading OAPEC states to ramp up oil production while maintaining higher prices. Germany scrapped plans for a 1974 driving ban, and speed limits were lifted by March. Despite these moves, the German economy grappled with the aftermath of the oil crisis. In 1974, the Federal Republic spent 23 billion Deutsche Marks (DM) on oil imports, a 153% increase from the previous year. Car sales plummeted, leading to reduced hours in the automotive industry and similar downturns in the construction materials sector, chemical industry, and iron and steel production. Unemployment surpassed one million by 1975.

The Second Oil Crisis and Political Change

After Shah Reza Pahlavi’s ousting in January 1979, Iran transformed into an Islamic Republic under Ayatollah Khomeini, triggering another oil crisis. Production shortfalls drove crude oil prices to DM 619 per ton by 1981, with energy imports consuming 4.85% of GDP. Germany slid into recession, seeing over 2 million unemployed for the first time in 1983. Rising prices prompted cuts to social welfare programs, with the SPD-FDP government in 1982 increasing social security contributions, reducing benefits, and restricting access to unemployment benefits. Child benefits for the second and third child were also reduced by DM 20 each. The FDP advocated further cuts to social welfare to address economic woes, with Economics Minister Otto Graf Lambsdorff and Foreign Minister Hans-Dietrich Genscher pushing for reduced state intervention in market affairs. In autumn 1982, the Liberals aligned closely with the CDU. On October 1, Chancellor Helmut Schmidt lost office in a constructive vote of no confidence, leading the Union parties, with FDP support, to elect CDU leader Helmut Kohl as the new Chancellor. Fresh elections were scheduled for March 1983, resulting in a CDU/CSU-FDP coalition securing a strong majority.

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The Reputation 

The further development and differentiation of business cycle analysis and, above all, the targeted observation of individual sectors were core fields of work at the ifo Institute and in particular addressed practical needs. Karl Heinrich Oppenländer, President of the ifo Institute from 1976 to 1999, was considered one of the outstanding economic observers of his time. Well into the 1990s, the ifo Institute’s reputation was founded on the quality of its economic surveys and practical research projects. That met the expectations of political decision-makers, but not quite those of the Council of Science and Humanities. Back in 1982, the latter expressed its mission in an assessment as being “to obtain proof of publications in internationally recognized, peer-reviewed and top-class journals that not only involved an interesting issue, but also demanded a profound theoretical and econometric foundation.” (Hans-Werner Sinn in his autobiography “Auf der Suche nach der Wahrheit” (“In Search of the Truth”).

The Evaluation

The German Council of Science and Humanities announced that its representatives would evaluate the ifo Institute on October 14 and 15, 1996. Meinhard Knoche, who had been appointed Managing Director on September 1, 1995, and had previously been Deputy Director of Administration and Head of the Human Resources Department at the Konrad Adenauer Foundation, endeavored to prepare for this evaluation by reorienting the Institute in line with the requirements of the Council of Science and Humanities. To achieve that goal and even before he officially took office in mid-1995, he initiated the reorganization of the entire IT infrastructure and a departure from the continuous personnel expansion of past years. He aimed for a gradual, socially responsible reduction in the headcount. Above all, however, he strove to develop a new mission statement and set up a certified quality management system. 

Buying Time

The draft resolution by the Council of Science and Humanities, which was revealed shortly before Christmas 1996, contained alarming statements: Considerable deficits in the methodological and theoretical foundation of most of the ifo Institute’s scientific work were identified. The commission recommended ending the ifo Institute’s funding as a research institution within the framework of the ‘Blue List Scientific Community’ (later the Leibniz Association). Time had to be bought before this draft resolution could be adopted in January 1997. Bavaria’s Minister of Economic Affairs Otto Wiesheu and, on the federal side, the State Secretary Johannes Ludewig intervened forcefully in the process and succeeded in having the decision on the resolution postponed. A working group of the German Council of Science and Humanities was set up prepare an expert opinion on the open questions by the end of 1997.

A Second Chance

The task now was to make immediate use of the time gained and to initiate a change in strategy that would reduce dependence on contract research, yet create freedom for scientists to publish ambitious research projects in peer-reviewed scientific journals as soon as possible.
An important component of this change in tack was the cooperation agreement concluded with the LMU Munich on September 11, 1997, which envisaged the joint appointment of the future ifo President (with a chair at the LMU), the participation of ifo scientists in teaching, collaboration in the areas of research and the encouragement of young academics, and representation of the LMU on the supervisory body.

Furthermore, ifo’s Bylaws were to be reformed so as to strengthen the Executive Board, the Board Council was dissolved and replaced by the Administrative Council, and the Scientific Advisory Council was enshrined in the Bylaws. Seven research areas (instead of the previous 17 specialist departments) bundled the human and material resources. As a result, the institute was able to work far more efficiently. 

A Big Sigh of Relief 

The Council of Science and Humanities concluded the pending evaluation process on January 23, 1998. To sum up its working group’s opinion, contract research had expanded at the ifo Institute and the vast majority of research work exhibited deficits. However, the service-oriented empirical work, such as the business, investment and innovation surveys in particular, were of national importance and merited funding. The funding bodies of the Joint Commission of the Federal and State Governments recommended that the ifo Institute should no longer be supported financially as a research institute, but rather “as a research-based service institution.” At the same time, the ifo Institute’s basic budget was to be restricted.

A New ifo President 

Further research funding by the federal and state governments (Blue List), which was vital for the institute’s continued existence, was secured. And despite the burdens caused by the evaluation process and internal reforms, ifo employees’ scientific productivity and productivity in projects funded by third parties improved significantly in the years 1996 to 1998.
In the course of 1997, Bavaria’s Minister of Economic Affairs, Otto Wiesheu, contacted Hans-Werner Sinn in order to recruit him as the ifo Institute’s new President. Hans-Werner Sinn had completed his habilitation at the University of Mannheim and had held the Chair of Economics and Insurance at the Faculty of Economics at LMU since 1984. In 1991, he was given the opportunity to establish the Center for Economic Studies (CES). In order to arouse Sinn’s interest in taking over as ifo President, the minister held out the prospect of developing the CES as an international research network – and that was how CESifo was born. The appointment of Hans-Werner Sinn, whose high academic reputation was to accelerate the ifo Institute’s transformation from a service organization back into a research institute, proved a success. The appointment commissions established by ifo and LMU unanimously recommended his engagement, and the Administrative Council elected Hans-Werner Sinn as President of the ifo Institute at its meeting on December 10, 1998. The new ifo President’s term of office began on February 1, 1999. 

Note: For the sources used in this text, click on the imprint.

Impulse

Germany’s First Economic Crisis

Between the fall of 1966 and the summer of 1967, the Federal Republic of Germany faced its first significant economic downturn. The unemployment rate increased from 0.7 to 2.1 percent. Prices rose, while wages barely moved. The budget situation became precarious, making subsidy cuts and social policy reductions seem inevitable. Political disagreements over the federal budget culminated in the dissolution of the Christian-Liberal government under Chancellor Ludwig Erhard in October 1966. Following Erhard’s resignation on November 30, a grand coalition of the CDU/CSU and SPD took over government responsibilities for the first time on December 1, 1966.

New Government, New Economic Policies

Chancellor Kurt Georg Kiesinger (CDU) announced an expansionary and stability-oriented economic policy in his government declaration on December 13, 1966. The economic crisis was to be countered with stimulus programs and the newly introduced Stability Act. The new Federal Minister of Economics, Karl Schiller (SPD), advocated for an “enlightened market economy” –  mix of competitive markets and state oversight, contrasting sharply with Ludwig Erhard’s preference for a free market economy with minimal state intervention. The Bundestag set the stage for the first economic stimulus package on February 23, 1967, with the Credit Financing Act, which authorized 2.5 billion Deutsche Mark, with 850 million Deutsche Mark earmarked for immediate measures including investments in federal railways, postal services, and road construction. Legal authorization was required for the necessary loans. Federal Finance Minister Franz Josef Strauss (CSU) had introduced the necessary Credit Financing Law. At the same time, the Bundesbank lowered key interest rates.

Ongoing Evaluation by the ifo Institute

Just a day after the Bundestag passed the Credit Financing Act, the ifo Institute summarized the situation in its ifo Schnelldienst publication on February 24, 1967: “The economic stimulus measures adopted by the Federal Government and the effects on the capital market from the reduction in the bank rate and the minimum reserve rates suggest that investment activity will pick up this year.” Data from the ifo Business Survey, the GfK consumer survey, and the Federal Statistical Office collected on March 17, 1967, indicated it was too early to declare a definitive shift in economic sentiment. Even the lecture by ifo board member Herbert Hahn printed in the Schnelldienst of June 19, 1967 merely explains “The current economic problems.” Only towards the end of 1967 did economic prospects start to improve as policymakers had hoped. The ifo Schnelldienst reported a strong increase in demand for capital goods in November, with the business climate in the manufacturing industry finally being assessed as predominantly positive by year’s end.

“A Table on Four Legs”

The Stability Act mandates that the federal government must present an annual economic report as a foundation for its actions, and every two years, a subsidy report must be published to disclose the development of financial aids and tax concessions. Economics Minister Schiller described the law as transitioning from a conventional to an enlightened market economy, likening it to a stable table standing firmly on four legs, grounded in rational insight and cooperation.

A Law with Lasting Impact

Unlike earlier proposals from the black-yellow coalition, the new federal government – and all that followed – were to pursue not only sound fiscal policies but also cyclically sensitive economic strategies. If circumstances required it, the federal cabinet would have the legal means to burden or relieve the economy with government measures, depending on the economic conditions. By the end of the 1969 legislative period, unemployment had fallen to 0.9 percent, and by 1970, it reached a low of 0.7 percent, nearing full employment. However, the 1973 oil crisis tested the limits of state economic control, leading to a surge in public debt and necessitating a reevaluation of the economic stabilization reserve. Since the Stability and Growth Act came into force, there have been heated debates about when and in what form the government should introduce measures to steer the economy. Despite varied opinions across political parties, the Stability and Growth Act remains in effect, a testament to its enduring relevance in guiding Germany’s economic policy.

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Optimism Unchecked by Reality

There was a prevailing sentiment that the digital revolution’s surge in innovation could somehow bypass traditional economic cycles, rendering recessions obsolete. Towards the end of the 1990’s, this optimism led to a startup boom in Germany, where nearly every idea related to new media or the internet received funding, with investors and corporations eagerly backing these nascent companies in anticipation of rapid growth. Expectations of quick growth overrode rational caution.

Germany’s Startup Mania

Taking inspiration from the American Nasdaq’s record-breaking performance, the German Nemax aspired to replicate this success. Indeed, initial expectations were met when the Nemax 50 hit an all-time high of 9,631.53 points on March 10, 2000. Government statistics highlighted the registration of around 300,000 “innovative, business-related service companies” at the millennium’s turn, facilitated by the expansion of necessary infrastructure like high-speed internet. Many of these start-ups simply relied on the digital transformation of “old economy” business models.  

The Bursting of the Bubble

Skeptics of the market’s irrational exuberance were few and far between. Stock market expert André Kostolany, for example, voiced his concerns as early as 1998 on an NDR talk show, calling the new economy a “scam with marked cards and cheats.” The inflated valuations of dotcom companies, which propelled their stock prices, lacked grounding in solid economic fundamentals. This disconnect led to the Nemax’s dramatic collapse. From being valued at 235 billion euros in 2000, the companies on the Neuer Markt plummeted to less than 30 billion euros by 2002, as their ambitious growth projections failed to materialize. 

A Tenuous Edifice of Market Fantasies

The case of Daniel David, a pop singer turned entrepreneur, illustrates this folly. On August 11, 1999, the day of a total solar eclipse, his company Gigabell went public. Despite heralding a new dawn for his company during its launch party, Gigabell, which started as a simple internet provider and operated at a loss, soared to a market valuation of 800 million euros without ever turning a profit. In November 2000, Gigabell was insolvent and was the first company to be excluded from the Neuer Markt. It declared bankruptcy in November 2000, becoming the first company to be delisted from the Neuer Markt. Other firms resorted to fraudulent financial reporting and deceptive announcements to maintain their facade for a time.
Failed business plans led to the collapse of over-hyped companies not just in Germany, but globally, catching inexperienced investors off guard with their rapid downturns. Many missed the chance to sell their shares in time, suffering significant financial losses. Similarly, the American Nasdaq took a dramatic plunge, falling from 5,048 points on March 10, 2000, to just 1,114 points by October 9, 2002.

The Legacy: A Surge in Innovation

Despite the market crash wiping out numerous companies and vast sums of investor money, the march of the internet and digitalization remained unstoppable. Today, giants like Google, Apple, Facebook, and Amazon demonstrate the enduring impact of the new economy, having revolutionized both our personal and professional lives.

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The Long Road to the Euro

The Delors Report, which was adopted in 1989 and named after the then President of the European Commission Jacques Delors, envisaged that European economic and monetary union would be achieved in three stages. In the Maastricht Treaty of 1992, the EU heads of state and government agreed on a legal framework and accession criteria for monetary union. The 1997 Stability and Growth Pact formulated specific requirements: The euro countries were allowed maximum annual new debt of 3% and a maximum total debt level of 60% of their gross domestic product. On January 1, 1999, the conversion rates of the national currencies to the euro were definitively set. Germany, France, Italy, the Netherlands, Belgium, Luxembourg, Austria, Ireland, Finland, Spain and Portugal handed over control of monetary policy to the European Central Bank (ECB), which was founded in 1998 and is based in Frankfurt am Main.

High Hopes and Concerns

Many economists hoped the importance of the euro would increase as a result of a large increase in confidence and the attractiveness of the European financial market and expected the currency would appreciate. However, as Jürgen Stark, State Secretary at the Federal Ministry of Finance, and keynote speaker at the ifo Annual Meeting in June 1998, warned: “Maintaining and intensifying the stability culture of the EMU member states is what is most vital to ensuring the euro can gain trust and take its rightful place in the international monetary system.” 
Other cautionary voices were also raised: The accession criteria for the member states of the monetary union were not strict enough. Conflicts between countries of different economic strength and stability would be foreseeable. The economist and Nobel Prize winner Paul Krugman even saw the introduction of the euro as an “invitation to disaster.” And indeed, before and after its introduction, the member states repeatedly violated the accession criteria and requirements of the Stability Pact.

Large Majority in Favor of the Euro in the Bundestag

When the German Bundestag was due to vote on the euro currency on April 23, 1998, the heated exchange of blows between the coalition and the opposition lasted almost seven hours. Federal Foreign Minister Hans-Dietrich Genscher (FDP) was one of the advocates of the new currency. This was “not just a monetary policy decision,” but a contribution to European unification of historic dimensions. The Bundestag should therefore not adopt any evasive “not now” and “not like this” stance, urged Genscher. A clear yes or no was needed.
Gregor Gysi (PDS) gave a clear thumbs down: The unification of Europe could not be accomplished through joint banks. In order to achieve far-reaching integration, taxes would also have to be brought into line and social, ecological and legal standards harmonized, argued Gysi.
At the end of the day, the introduction of the euro as the new European common currency was approved by a surprisingly large majority: Only 35 out of 672 members of the Bundestag voted no.

Die Schwächen der neuen Währung

In 2001, the ifo Institute conducted its first stocktake: Since its introduction on January 1, 1999, the euro had lost over a quarter of its external value. The persistent weakness of the European currency could not be explained by macroeconomic factors, and in the 2001 Schnelldienst No. 13 journal there was an exchange of views among academics. They concurred that “only confidence in the existence of a de-facto, economically dynamic and stable euroland would sustainably strengthen the euro.” Ultimately, “economic policy reforms that credibly promise greater real economic dynamism are more important for stabilizing the euro exchange rate than the circulation of a single currency.” There were also calls for firm rules and stricter budgetary discipline in the member states and for the ECB to act with assurance.
A good decade after its introduction, the then ifo President Hans-Werner Sinn paints a gloomy picture of the euro’s introduction.

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The Domino Effect of Subprime Loans

From 1990 to 2006, the U.S. real estate market saw an unprecedented boom. However, inflation began rising by the end of 2005, prompting the Federal Reserve to increase interest rates. This change led to a real estate glut as low-income households, burdened by variable-rate loans, found themselves unable to meet their mortgage obligations. These risky, under-collateralized loans – known as “subprime loans” – were widespread across the balance sheets of numerous banks and had permeated the global financial system. The subsequent plunge in U.S. real estate prices deval-ued these assets drastically, leading to a systemic collapse.

High-Profile Bailouts and the Lehman Collapse

Lehman Brothers, a major U.S. investment bank, became emblematic of the financial crisis. Despite the U.S. government’s intervention to save other financial giants like Bear Stearns, Freddie Mac, and Fannie Mae, Lehman found no rescuers and declared bankruptcy. Soon after, the insurance giant American International Group (AIG) faced similar peril but was deemed too integral to fail; it was rescued by the Federal Reserve and the Treasury Department. To avert a total financial meltdown, the U.S. government launched a $700 billion bailout package.

The crisis quickly escalated into a global catastrophe. In October 2008, Iceland declared national bankruptcy. The following month, the G20 countries convened in Washington, D.C., agreeing on coordinated actions to tackle the global economic crisis and fundamental reforms to financial market regulations. By April 2009, at a G20 summit in London, stricter controls on financial institutions were mandated to prevent future crises similar to the 2007 mortgage debacle.
 

German Response to the Financial Turmoil

In Germany, Federal Finance Minister Peer Steinbrück assured citizens of the safety of their savings. The German government intervened to prevent the collapse of Hypo Real Estate Bank with substantial financial aid. The EU finance ministers also agreed to use EU funds to safeguard critical financial institutions. On October 18, 2008, the German Bundestag passed the Financial Market Stabilization Act (FMStG), creating a €480 billion Financial Market Stabilization Fund (FMS) to bolster banks’ liquidity and enable them to fulfill their obligations. Hypo Real Estate, along with Bayerische Landesbank, HSH Nordbank, and Commerzbank, were among the first to draw on these funds.

ifo Institute’s Perspective on Risk Distribution

The 2008 financial crisis ignited fears that unchecked speculation could lead the global economy to disaster. Hans-Werner Sinn, President of the ifo Institute from 1998 to 2016, offered a more nuanced view in his 2009 book Casino Capitalism. He argued that risk-taking drives innovation and societal progress but criticized the outsourcing of risks to third parties. Sinn contended that such practices encourage excessive financial risks because the negative impacts can be offloaded onto other investors, leading to taxpayer-funded bailouts when crises occur.

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The Genesis of Practical Economic Research

The story begins in 1925, with the founding of the Institute for Economic Observation of German Finished Goods at the Nuremberg School of Commerce by Wilhelm Vershofen, around the same time as the Institut für Konjunkturforschung (IfK), now known as the German Institute for Economic Research (DIW), in Berlin. Ludwig Erhard, who later became a pivotal figure in German economic policy, joined this Nuremberg institute in 1928, contributing significantly to its development, especially in industrial market research. After facing a career setback in 1942 by being denied a succession at the head of the institute, Erhard established his own institute, laying the groundwork for future endeavors.

From Economic Research to Political Influence

Ludwig Erhard’s career was a blend of academic prowess and political acumen. Following World War II, as U.S. troops entered his hometown of Fürth on April 19, 1945, Erhard quickly aligned himself with the American military authorities, offering his expertise as an economist. By October 1945, he was appointed Minister for Trade and Industry in Bavaria. His roles within the economic frameworks of post-war Germany, including his leadership in preparing for the currency reform and his position as Director of the Economic Council of the Bizone in March 1948, were instrumental in shaping his path to becoming the first Minister of Economics in Adenauer’s government.

Bridging Science and Practice

The “Institute for Industrial Research” founded by Erhard in 1942 became the “Institute for Economic Observation and Economic Consulting” (from 1946) and in 1947 the “South German Institute for Economic Research.” Erhard’s vision was clear: he believed that non-university economic research institutes should serve as bridges between academic research and practical economic and state applications. He soon used the metaphor of the “bridge” that an economic research institute had to build between university economic research on the one hand and state and economic practice on the other. This vision was rooted in a commitment to non-partisan, scientifically rigorous work that directly engaged with the challenges and opportunities of post-war Germany.

Challenges and Merger

Despite its ambitious beginnings, the South German Institute for Economic Research faced financial difficulties by 1947, struggling to secure the necessary funds for expansion. Erhard and his colleagues had relied on private-sector support, but without public funding, the future of the institute was uncertain. Simultaneously, another economic monitoring institute, initiated by Karl Wagner at the Bavarian State Statistical Office, was expanding its capabilities. Together with Hans Langelütke, Wagner continued to expand the information services in the field of economic observation at the State Office from April 1948, before bundling them into the “Information and Research Center for Economic Observation” (ifo). This institute began conducting company surveys immediately after the currency reform and launched the “Ifo-Schnelldienst” in 1948, which became a critical resource for economic data.

The Formation of the ifo Institute

The Bavarian state government, recognizing the potential of consolidating resources, encouraged the merger of these two institutes. On January 24, 1949, the agreement was signed to form the Institut für Wirtschaftsforschung e.V. München – shortened to the ifo Institute. Starting its operations in March 1949 with specialist departments in economics, industry, and business administration, the institute quickly established itself as a leader in applied economic research, despite the modest beginnings in makeshift barracks. The Bavarian State Statistical Office provided the institute with some rooms in the buildings at Rosenheimer Strasse 130 – a former, partially bombed-out police barracks – as an interim solution. Most of the staff were housed in two wooden barracks on the former parade ground of the barracks.

Note: For the sources used in this text, click on the imprint.

Beginnings

People

Challenges Along the Way

The journey towards integration wasn’t without its hurdles. In 1954, the proposed European Defense Community (EDC) stumbled due to a veto from the French Na-tional Assembly, highlighting the complexities of aligning not just economic but also military and political interests across nations. A pivotal moment came in 1955, when the stalled unification efforts were revitalized by focusing on economic collaboration based on the successful model of the ECSC.

Strategic Economic Discussions

The revival of integration efforts gained momentum at the Messina Conference in 1955, where ECSC members convened to discuss a new economic community. The conference, led by French Foreign Minister Jean Monnet, who was instrumental in proposing the economic unification, also prioritized cooperation in the nuclear sec-tor, seeing the peaceful use of nuclear energy as a key component of their collective progress.

Formulating the Common Market

The “Spaak Commission,” named after Belgian Foreign Minister Paul-Henri Spaak and set up as a result of the conference, developed recommendations that formed the basis for establishing a common market. This market was envisioned to encom-pass free movement of goods, services, capital, and people, alongside a common agricultural market and a unified European trade policy. These initiatives were aimed at eliminating customs barriers and quotas, thereby fostering a more integrated Eu-ropean economy.

Significant Milestones in Rome

On March 25, 1957, the six founding states signed the Treaties of Rome, establishing the EEC and the European Atomic Energy Community (EURATOM). These treaties, which came into effect on January 1, 1958, were seen by German Chancellor Konrad Adenauer not just as economic agreements but as pivotal political instruments aimed at furthering European political integration through economic collaboration: “The Common Market must be seen not primarily as an economic treaty, but as a political instrument. It must be seen in conjunction with the Council of Europe, the Coal and Steel Community and EURATOM; in short, it is a series of political facts. The EEC is essentially a political treaty, the purpose of which is to achieve the political integration of Europe by means of economic commonality.” 

The ifo Institute’s Role and Perspective

From the beginning, the ifo Schnelldienst, a publication of the ifo Institute, covered various facets of European cooperation, starting with discussions on meat produc-tion within the EEC in 1957. From 1961 onwards, the focus broadened. As the EEC’s Directorate-General for Economic and Financial Affairs sought to standardize official statistics and introduce industry surveys, ifo was tasked in 1961 with implementing these surveys in Western Germany. Closely based on the ifo tendency surveys, the European Business Survey was published monthly from spring 1962 onwards and was carried out in around 14,000 industrial companies in the European Economic Community. An annual investment survey was added somewhat later. The results of both surveys have been published regularly in the Schnelldienst since 1963.  

A Critical Voice Amidst Economic Optimism

While the EEC was generally viewed positively, the ifo Institute maintained a critical stance, questioning the direct correlation between the EEC and economic upturns in member states. This skepticism was articulated in the Schnelldienst on May 24, 1963, arguing that while economic integration contributed to growth, the real drivers were the intrinsic economic strengths of member countries like France, Italy, and West Germany. The ifo’s objection to the generally positive assessment of the effectiveness of the new economic community, was based on the institute’s own surveys, which intervened in the public debate with fact-based arguments. Even today, develop-ments and policy decisions in the EU are a strategically important field for the ifo Institute and for the political platform EconPol.

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The Toll of Russia’s Aggression on Ukraine

Ukraine’s economy has been severely battered by the conflict. By spring 2023, the World Bank pegged the war damages at USD 411 billion, while Ukraine’s own estimates for reconstruction soared to USD 750 billion. The war has ravaged infrastructure, decimated private consumption, and ground foreign trade to a halt due to Russia’s blockade of Ukrainian ports. International aid efforts have provided some relief, and countries including Germany have supported Ukraine with critical military aid. As per the UNHCR, 13.7 million Ukrainians were displaced, with about 6.4 million managing to return home. The ifo Institute’s surveys of Ukrainian refugees have shed light on their motivations for leaving, settling in new countries, and the factors influencing their decisions to stay abroad or return to Ukraine.

Germany’s Economic Struggles

The war in Ukraine has precipitated a sharp rise in gas and commodity prices in Germany, in some cases by almost 90 percent. The spike in gas prices has, in turn, escalated the cost of electricity production, hitting the chemical industry – a major energy consumer in Germany with around 9 percent of the total German consumption – particularly hard. A survey by the German Chemical Industry Association (VCI) found that 70 percent of chemical companies were severely affected by the surge in energy prices as of May 2022, with no immediate recovery in sight. The ifo Business Climate Index for the chemical sector has remained in the negative since mid-2022, hinting at potential production drops or the relocation of manufacturing capacities abroad.

Sanctions: A Mixed Bag

In retaliation to Russia’s invasion, the EU, alongside its partners, unleashed unprecedented sanctions, including severing Russia from international financial systems, imposing comprehensive trade embargoes, and closing EU airspace to Russian planes. These measures have made a dent: EU exports to Russia dropped to 37 percent of their pre-war levels since the conflict began. 
However, reports suggest these sanctions are being circumvented, especially regarding military equipment supplies. An ifo study highlighted a significant increase in exports of economically critical and military-industrial goods to Russia from countries like Armenia, Kazakhstan, Uzbekistan, Kyrgyzstan, and Turkey. They exported 50 times more goods critical to the Russian economy or important to the military industry to Russia in 2022 than they exported in general goods to all destination countries in 2019.

The Israeli Front and Broader Implications

The attack by Hamas has resulted in numerous Israeli hostages and prompted extensive Israeli military strikes targeting Hamas in Gaza. The conflict has inflicted heavy casualties on both sides and significantly worsened the humanitarian crisis for Gaza’s civilian population. There’s global concern that the Middle East conflict could escalate further, potentially drawing in the USA or Iran. “It is therefore a fragile situation, against the backdrop of which the economic risks are increasing,” notes ifo President Clemens Fuest. According to the ifo Institute, the Middle East conflict could once again put the brakes on economic development in Germany. The nation’s deep integration with international trade networks makes it particularly vulnerable to such crises, notably affecting its industrial sector already strained by the energy crisis from Russia’s aggression.

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How Did Greece Slide into the Crisis?

The 2010 euro crisis escalated as a result of the global financial crisis, which was triggered by the real estate bubble bursting in the US in 2007 and further exacerbated by major banks going bankrupt. The Greek government lost some of its regular revenue. A review revealed that the Greek deficit ratio was almost 16% and the level of debt was around 130% of gross domestic product. That exceeded the limits set out in the Maastricht Treaty and the Stability Pact (3% deficit and 60% debt) many times over. Greece’s standing among international rating agencies deteriorated dramatically, with the interest rate for Greek government bonds rising from 8.02% in 2010 to 25.17% in 2011.

Other Countries Get into Difficulties

This turbulence led to a massive withdrawal of capital and also to a crisis in other eurozone members. Countries such as Ireland and Spain, which were hit hard by the real estate crisis that led to a debt and banking crisis, were also pushed to the brink of national bankruptcy. Ireland’s GDP fell by 7% in 2009 and unemployment there rose to 14% in 2010. There was also a lack of important government revenue, while enormous sums had to be spent on bailing out the banks. These national bailouts amounted to around 35% of Ireland’s gross domestic product, and the debt-to-GDP ratio exploded from just 25% (2007) to almost 100% (2010). In Spain, too, economic output fell by almost 4% in 2009 and unemployment soared to 20% in 2010.

The Rescue Package is Unfurled

The EU and the European Central Bank intensified their cooperation to support the unstable countries. Together with the International Monetary Fund (IMF), they unfurled the “euro rescue package.” It approved loans only if a country adopted a rigorous austerity policy. Another EU-wide measure was the European Semester, which gave the EU Commission and the EU Council of Ministers the opportunity to review the national draft budgets in the first six months of each year and urge changes where necessary. In addition, the 2012 Fiscal Compact committed governments to a strict budgetary policy and the introduction of a debt brake. German Chancellor Angela Merkel endorsed these stringent measures, stating that the restoration of economic stability in the crisis countries required a rigorous austerity policy. Only those adopting a strict budgetary policy were able to access funds from the euro rescue package.

“Breathing Monetary Union” as a Way Forward?

Hans-Werner Sinn, President of the ifo Institute until 2016, actively participated in the conversation. He commented for the first time in a special issue of Schnelldienst in November 2010. In 2015, he summarized the many years of debate in his book “Der Euro. Von der Friedensidee zum Zankapfel” (“The Euro. From the Idea of Peace to a Bone of Contention”). His conclusion: In the event of an imbalance in the national budget, the partners of the monetary union must be deprived of the opportunity to make risky investments with other people’s money in the knowledge that potential losses would be absorbed by the community. In order to overcome the crisis, rigorous debt relief was necessary for the crisis countries. The countries receiving such relief would then have to leave the monetary union for a transitional period. That was the only way to restore their competitiveness. In such a “breathing monetary union,” it would not be unusual for countries to keep on entering and leaving it.

Five Points for Exiting the Crisis

Clemens Fuest, President of the ifo Institute since 2017, published the book “Der Odysseus-Komplex. Ein pragmatischer Vorschlag zur Lösung der Eurokrise” (“The Ulysses Complex. A Pragmatic Proposal for Solving the Euro Crisis”) together with Johannes Becker in the year he took office. The authors’ conclusion: Like Ulysses, who asks to be tied to the mast of his ship in order to resist the Sirens’ song, the euro countries must also bind themselves to fixed rules in order to avoid the seduction of new debt, deferment of reforms and lax regulation. Their proposal is a “five-point program for a stable eurozone” with reform proposals for banking regulation at the EU level, effective debt control measures, a reorientation of European rescue measures, the declaration of measures in the event that a country is unable to return to the capital market within a deadline, and lastly a clear ban on state financing by the European Central Bank and a definition of the ECB’s mandate. The prime goal of all these measures is to strengthen national responsibility for a country’s own economic policy.

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