Overview
People
Places
Times
Alfred von Heymel: Publisher, Patron of the Arts, Bon Vivant.
Munich, 1909: What does a well-known bon vivant do when he comes into a fabulous inheritance? He buys an exclusive 4,400 square meter plot in Herzogpark for 96,000 German marks and commissions on of the city’s most sought-after architects, Karl Stöhr, to build an opulent neoclassical-style house for him for another 180,000 marks. Fast forward to today, the impressive building at Poschingerstrasse 5, which was completed in 1910, is now home to the ifo Institute. Its first owner, Alfred Walter von Heymel, was indeed a colorful personality.
“Beautiful Women, Beautiful Horses, Beautiful Flowers ...
... English books in supple leather bindings, lots of good food and drink, accompanied by a host of friends, some closer than others – this was how the young men from Bremen, Alfred von Heymel and his cousin Rudolf Alexander Schröder, spent their days and nights,” described writer Rolf von Hoerschelmann, painting a vivid picture of their lifestyle.
“Die Insel” – A Beacon of Literary Modernism in Germany
Heymel’s most important patronage was the literary magazine “Die Insel”, which he founded together with Rudolf Alexander Schröder in 1899. Contributors included literary greats such as Hugo von Hofmannsthal, Rainer Maria Rilke and Robert Walser and the illustrations were by none other than Heinrich Vogeler.
Rolf von Hoerschelmann reminisces, “It featured modern poems, literary gems from all eras and countries, and witty essays, all printed on heavy floral paper and bound in exquisite designs, thanks to its connection with the Insel Verlag book publisher.” This book publisher, also founded by Alfred von Heymel and Rudolf Alexander Schröder in 1901, still exists today, unlike the magazine, which ceased publication just three years after its founding. There were simply too few buyers and the financial burden eventually became too much for even a wealthy patron like Heymel to bear.
The End of a Magazine, The Start of a Dramatic Life
In 1904, von Heymel married Gitta von Kühlmann, a “blonde aristocratic beauty,” as von Hoerschelmann puts it. In 1910, the couple moved into their new villa at Poschingerstrasse 5, but the marriage failed. Seeking a fresh start after his divorce, von Heymel travelled extensively in Africa before settling in Berlin in 1912, where he died two years later after suffering from tuberculosis.
From the 1920s, the consulates of the then Kingdom of Siam and Argentina, among others, resided in the Villa Heymel. The first employees of what is now the ifo Institute moved into the imposing building in 1952. If you take a walk through Bogenhausen district, you can see it up close.
People
Local History
Celebrating Excellence: CESifo‘s Nobel Laureates
Today, marking 25 years since its inception, the CESifo network stands as one of the largest economic research collectives globally. Regular gatherings in Munich and around the world foster an exchange of ideas among international researchers, enhancing their understanding of complex economic issues. The prestige of this network is underscored by the exceptional caliber of its members, including 13 Nobel laureates from its ranks of over 2,000 members.
Tracing Women in the Labor Market
Among the distinguished is Claudia Goldin, Henry Lee Professor of Economics at Harvard University, who became only the third woman ever to receive the Nobel Prize in Economics in 2023. And she won it for her research in a field that, for a long time, also received little attention. Her work explores the historical role of women in the labor market, tracing back to the 18th century to uncover roots of present-day wage disparities, family structures, and educational inequalities. Claudia Goldin has been a member of the CESifo network since 2022 and is one of six CES Fellows to receive this coveted award by the Royal Swedish Academy.
Labor Market Dynamics
David Card, another notable CESifo member since 2024, was awarded the Nobel Prize in 2021, together with Joshua Angrist and Guido Imbens. His empirical research in labor economics, particularly his findings that increased minimum wages do not necessarily reduce employment, challenges long-standing economic assumptions.
He deals with central and real-life questions – why do people succeed or fail in the labor market? What factors drive wage inequalities? Given his wealth of publications and findings, it is all the more astonishing that David Card originally studied physics and only later switched to economics.
Development Economics and Poverty Reduction
Before Claudia Goldin, Esther Duflo was the second woman to receive the Nobel Prize in Economic Sciences from the Royal Swedish Academy. Awarded in 2019, she shared this honor with her husband, Abhijit Banerjee, and Michael Kremer. Duflo stands out as the youngest economist to receive this distinction. Specializing in development and social economics, her passion for addressing poverty, hunger, and social inequality was influenced by her mother, a pediatrician who worked with humanitarian organizations. It seems almost destined that Duflo would earn the Nobel Prize for her groundbreaking work in poverty research. Since the 1990s, she and her research partners have been using field experiments to devise effective strategies to combat global poverty. Esther Duflo has been a valuable member of the CESifo Network since 2013, contributing her expertise and experience.
Principles of Human Behavior
Many people see contracts as one thing above all else: Sheets of paper and tedious bureaucracy. The Finnish economist Bengt Holmström, however, who joined CESifo in the same year he won the Nobel Prize in 2016, has significantly advanced the understanding of contract theory, particularly in how companies can optimize CEO contracts. His work has broader implications for corporate governance and legal frameworks, offering new perspectives on human behavior and economic incentives within corporate structures. As he comes from the Swedish minority in Finland, he is probably one of the few laureates who could follow the ceremony in his native language.
Practical Insights in Contract Theory
2016 was a good year for Nobel Prize winners in the CESifo network. In addition to Bengt Holmström, the jurors decided to award the prize equally to Oliver Hart from Harvard University and his contribution to contract theory. A foundational figure in contract theory, Hart’s innovative work has profoundly influenced both academic thought and practical policy. Journalists, for example, maintain the conviction that Hart influenced the U.S. government in its decision to no longer leave the management of prisons to private contractors. An active member since CESifo’s inception year 1999, his insights have shaped our understanding of how contracts are utilized within and outside the marketplace. Hart’s contributions were recognized with a Nobel Prize, and his ongoing impact was further acknowledged with a knighthood by King Charles III in 2023.
Leaving Poverty Behind
Scottish economist Angus Deaton delves into whether wealth equates to happiness, applying a rigorous economic perspective. Deaton, who was awarded the Nobel Prize in 2015 – a year before Hart and Holmström – received this honor for his lifetime contributions, as noted by the committee. His profound insights into need may stem from his own humble beginnings. Deaton’s research focuses on how individual spending patterns influence societal economic development. Throughout his fieldwork, he repeatedly encounters individuals who have remarkably overcome dire poverty, reinforcing his belief that escaping poverty is always possible. Since 2004, he has been sharing these inspiring stories within the CESifo Network, and in 2016, he was knighted by Queen Elizabeth II, becoming Sir Angus Deaton.
The “Application-Oriented Theorist”
A Nobel laureate in 2010, Diamond’s research into markets with search frictions has clarified the dynamics between policies and economic outcomes like unemployment and wages. With him, Dale T. Mortensen and Christopher A. Pissarides also received the prize. An “application-oriented theorist”, as Nobel Prize winner Eric Maskin once called him, Diamond‘s analysis of pension structures contributed to the reform of the U.S. system and the reconstruction of the Polish pension system. Peter A. Diamond, CESifo member since 2000, strives to get to the bottom of things – a fact that is also shown by his subsequent studies at Harvard Law School. Diamond is now Professor Emeritus at MIT, where he taught from 1966 to 2011.
The Human Factor
His own website describes Edmund S. Phelps‘ life‘s work as a project to embed “people as we know them” in economic theory. Phelps received the Nobel Prize in 2006 “for his analysis of intertemporal tradeoffs in macroeconomic policy”. His pioneering research began in the 1960s, challenging the then-prevailing assumptions about correlations between inflation and unemployment. During his career, he worked on various theoretical approaches and always added the human factor. In his analyses, Edmund S. Phelps recognized that the models failed to take into account ill-considered decisions or decisions made in the absence of better information. He has been sharing his approaches as a member of the CESifo network since 2000.
Conflict Theory in the Cold War
As a former classmate of Edmund S. Phelps, it‘s a striking coincidence that Thomas Schelling was awarded the Nobel Prize just a year before him. In 2005, the Royal Swedish Academy recognized Schelling, along with Robert J. Aumann, for advancing our understanding of conflict and cooperation through game theory analysis. During World War II and the early 1950s, Schelling contributed to politics, notably helping to craft the Marshall Plan. His 1960 publication, “The Strategy of Conflict,” remains one of his most renowned works, considered one of the 100 most influential books in the West since 1945. During the Cold War, his studies became particularly influential: Schelling viewed war as a bargaining process and argued that the best defense against a nuclear attack was to safeguard one’s own nuclear arsenal. Thomas Schelling was a valued member of the CESifo Network from its inception in 1999 until his death in 2016 at the age of 95.
The Heckman Correction
James Heckman's areas of expertise lie in political economy and statistics. He takes a deeply analytical approach to finding where economics and other sciences intersect in order to grasp the essential problems of society. Together with Daniel McFadden, he succeeded in developing “Theories and Methods for the Analysis of Selective Sampling”, which earned them both the Nobel Prize in 2000. His “Heckman correction” technique has enabled economists and policymakers to make more accurate interpretations of data where sample selection is biased. A member of CESifo since 2003, Heckman’s work has bridged the gap between theoretical economics and practical application in fields such as education and labor economics.
Gary Becker
Robert M. Solow
Reinhard Selten
From sociology in economics to game theory
Recognized with the Nobel Prize in 1992, Gary Becker (1930-2014) was a pioneer in extending economic analysis to domains traditionally considered outside economics, such as sociology. A CESifo member since 1999, his approach has influenced broad areas of human behavior and interaction. Awarded the Nobel Prize in 1987, Robert M. Solow‘s (1924-2023) models of economic growth have been fundamental in the study of how economies evolve over the long term. His work emphasizes the role of technological progress and its impact on growth. As a member of CESifo since 1999, the success of Solow’s work also shows in the fact that four of his students, including Peter A. Diamond, were also able to claim the Nobel Prize. As the only German Nobel laureate in Economics, awarded in 1994, Reinhard Selten (1930-2016) was renowned for his refinements of game theory. His work has provided deep insights into economic behavior and strategy, which have had profound implications across various fields. A member of CESifo from 1999 until his death in 2016, Selten’s contributions continue to resonate within the network.
Network
People
Elinor Ostrom: A Legacy of Community and Sustainability
Elinor Ostrom (1933-2012), a professor of economics at Indiana University, Bloomington, USA, alongside her husband Vincent Ostrom, was instrumental in founding the so-called Bloomington School. Her work focused on bridging the gap between state and market forces, advocating for efficient, hybrid governance systems. Ostrom championed the principles of self-organization, steering away from centralized state control. The “Elinor Ostrom Villa” at the ifo Institute, adjacent to the main building at Poschingerstrasse 5, honors her Nobel-winning legacy.
Recognition of a Trailblazer: The Nobel Prize
In 2009, Elinor Ostrom broke new ground by becoming the first woman awarded the Alfred Nobel Memorial Prize in Economic Sciences. The Royal Swedish Academy of Sciences lauded her for demonstrating “how common property can be successfully managed by user organizations.” Her path to this pinnacle was fraught with challenges. Initially, when she secured her first scholarship at the University of California, Los Angeles, in 1960, there was skepticism from faculty members who considered it a “waste of scarce resources” to invest in a woman who, they believed, was unlikely to ascend to a professorship.
Such skepticism was proven unfounded as Ostrom’s career unfolded, marked by significant contributions to environmental economics and the study of commons. According to the Nobel Committee, she explored how communities often devise sophisticated decision-making and enforcement mechanisms to avert “imminent conflicts of interest” in managing shared resources, effectively sidestepping the need for dominant state or market interventions.
Her research was concerned with the question of how people organise themselves in order to tackle complex tasks together. She analysed how the rules of institutions affect the actions of individuals who are exposed to certain incentives and have to make decisions. And she presented comprehensive solutions to these challenges.
Sustainable Self-Organization
Ostrom gained international recognition with her seminal work, “Governing the Commons: The Evolution of Institutions for Collective Action” (1990), where she argued that local cooperation, rather than state administration or privatization, often leads to the most sustainable management of commons. Through her global research, Ostrom identified successful and unsuccessful instances of community-based resource management, formulating the “Design Principles” for effective governance. These principles stress the importance of clearly defined boundaries for resource use, collective decision-making processes, and accessible, direct conflict resolution methods.
Wisely Managing Common Resources
The challenge of resource depletion, such as overfishing in oceans, deforestation, and the exhaustion of natural resources, raises the question: Is this inevitable? Advocates of centralized resource management often cite the “tragedy of the commons” to justify their approach. This concept, introduced by U.S. microbiologist and ecologist Garrett Hardin in his 1968 essay, paints a grim picture of communal resource exploitation. He uses a vivid image: a pasture open to all, where each herd owner, motivated by profit, increases their sheep count, leading to overgrazing and eventual ruin. According to Hardin, unrestricted access to limited resources invariably results in their overexploitation, concluding that “Freedom in the commons brings ruin to all concerned.” But Elinor Ostrom’s research uncovered that privatization or centralized government control are not the only paths to preventing resource depletion, highlighting the potential for local communities and resources.
Innovations Beyond Market and State
The assumption that the market is the sole mechanism for managing private goods, and that centralized control is necessary to curb selfish behavior in the management of public goods, is challenged by Elinor Ostrom’s extensive body of work. Her database at the Center for the Study of Institutional Diversity in Tempe, Arizona, contains over 1,000 case studies on the shared use of scarce resources, showcasing a vast array of instances where individuals cooperatively manage resources in environmentally sustainable ways.
One of her earliest field studies in the 1970s focused on groundwater management in Southern California, an area facing the critical challenge of dwindling groundwater reserves amid a growing population. Through her investigation, Ostrom encountered a variety of structures and flexible networks that local municipalities had developed to regulate groundwater extraction. This study uncovered that that the communities in small and medium-sized towns, through necessity, had formed governance structures more adept at addressing the challenges of water management than larger, centralized state institutions.
Learning from Lobster Fishermen in Maine
In the 1920s, the lobster populations off the coast of Maine faced near extinction due to overfishing. This crisis prompted the local fishermen to take innovative steps towards self-organization to preserve their livelihoods and the lobster stocks. They instituted a series of creative rules aimed at sustaining the lobster population. One notable measure was the tagging of pregnant female lobsters before releasing them back into the ocean, ensuring they could continue to contribute to the reproductive cycle. A trader who offered an animal with a tag at a market was ostracized by fishermen and buyers alike. This practice discouraged fishermen from catching these crucial contributors to the lobster population’s regeneration.
This example from Maine and other cases are a testament to Elinor Ostrom’s assertion that complexity in managing common resources does not inevitably lead to chaos. Instead, it shows how localized, community-based approaches can yield sustainable solutions, ensuring the long-term viability of shared resources.
People
Exploring Dual Leadership: Podcast with Stephanie Dittmer and Clemens Fuest
Can two heads lead better than one? Stephanie Dittmer and Clemens Fuest, co-leaders of the ifo Institute, embody this approach, balancing the scientific freedom and administrative necessities inherent in managing a renowned research institute. Their leadership style, characterized by shared responsibilities, not only fosters a culture of collaboration but also integrates the nuances of managing such dynamic tensions within their organizational framework.
In the realm of research, maintaining independence from political and societal influences while delivering top-notch research poses significant challenges. How does ifo navigate these waters, and what metrics are effective for guiding staff performance?
Tania Lieckweg, a consultant specializing in strategy development, leadership, and organizational growth, sheds light on the efficacy of dual leadership. She highlights the importance of embracing dissent, aligning under a unified strategy, and prioritizing more than just output metrics to ensure leadership success.
This insightful discussion is available in a podcast as part of the series "Die Zukunftsmacher*innen" (The Future Makers) produced by osb international systematic consulting, first released as a "Science Special" in December 2023 (German only).
Impulse
Ludwig Erhard: Scientist, Chancellor, Visionary.
Ludwig Erhard’s name is synonymous with the concept of the social market economy, which remains the cornerstone of the Federal Republic of Germany’s economic system to this day. Erhard‘s political journey led him from serving as the Federal Minister of Economics under Chancellor Konrad Adenauer from 1949 to 1963, to holding the prestigious office of Chancellor himself from 1963 to 1966. Erhard also played a pivotal role in the establishment of the ifo Institute.
Academic Career Over Family Textile Business
Ludwig Erhard was born on February 4, 1897, in Fürth, Bavaria. After attending elementary and secondary school and completing an apprenticeship as a linen merchant in 1916, he was expected to take over the family textile business. However, his life took a different turn: Despite a foot deformed by polio, Erhard served as a soldier in World War I from 1916. He was severely wounded in 1918 at Ypres (Belgium) and discharged from military service in 1919.
Instead of joining the family business, he enrolled at the Nuremberg College of Commerce, graduating in 1922 with a degree in business administration. He then studied business economics, national economics, and sociology at the University of Frankfurt, with a particular interest in economics: Erhard once described himself as a student who “wanted to learn business economics but was possessed by a zeal for economics.” In 1925, Erhard earned his PhD and joined the family business as a managing director, but he had to declare bankruptcy for the company in 1929.
A year before the bankruptcy of his family business, Ludwig Erhard had already returned to academia, joining the Institut für Wirtschaftsbeobachtung der deutschen Fertigware, a marketing research institute. There, he rose to the position of Deputy Research Director. In 1942, he left this role to establish his own institute for consumer research, the Institut für Konsumforschung, which, even at the height of World War II, began to address questions of post-war reconstruction. The founding of this research institute is considered a key precursor to the establishment of the ifo Institute.
A “Left-wing Democrat” Takes Bavarian Economic Helm
Erhard’s successful work in economic observation, economic policy analysis, and advising practitioners paved the way for his political career. The very day after American troops liberated his hometown of Fürth on April 18, 1945, Erhard stepped forward, offering his vast economic expertise to the occupying forces. Recognizing his potential, the American military governor appointed him as the Minister of Trade and Industry in the nascent Bavarian state government on October 22, 1945. At this time, Erhard was not affiliated with any political party but was nonetheless categorized as a “Left-wing Democrat” in the administration led by the Social Democratic Minister President Wilhelm Hoegner.
At the turn of the year 1945/46, Ludwig Erhard assessed the Bavarian government’s capacity for reconstruction as limited. He stated that “a purely Bavarian economic policy could not solve the impending problems; this could only be achieved within a German framework and in cooperation beyond Germany's borders.” This demand was seen as provocative by some of his government colleagues. Ludwig Erhard increasingly isolated himself in Bavarian politics. After the first elections to the Bavarian State Parliament on December 21, 1946, he lost his position.
Broadening Horizons Beyond Bavaria
Once again, a professional setback turned out to be the next step in Ludwig Erhard’s rapid career ascent. The post-war years in Munich not only fueled his political ambitions but also provided him opportunities to engage with leading national economists and financial scholars. He was particularly active in the “Volkswirtschaftliche Arbeitsgemeinschaft für Bayern,” founded by Adolf Weber, where he gained further economic expertise that propelled his political career beyond the borders of Bavaria. In 1947, Erhard headed the Special Division Currency and Credit at the Finance Administration of the British-American Bizone in Frankfurt. On March 2, 1948, he was elected Director of the Department for Economics of the Combined Economic Area, making him responsible for economic policy in the Western occupation zones. Following the first Bundestag election in 1949, Chancellor Konrad Adenauer (CDU) appointed him as the Minister of Economic Affairs in his first cabinet.
The German Economic Miracle
Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Aenean commodo ligula eget dolor. Aenean massa. Ludwig Erhard was a staunch advocate for a free, social market economy, which led to remarkable growth in West Germany for a decade and a half. The Federal Republic emerged as a leading industrial and export nation.
After serving 14 years as Minister of Economic Affairs, Erhard moved into the Chancellor's office in 1963, but his tenure lasted only three years. Disagreements over economic and fiscal policies led to the collapse of the governing coalition between the CDU/CSU and FDP in 1966. During Erhard’s chancellorship, West Germany faced its first economic crisis, with economic growth having slowed since 1960. Criticism of Erhard’s austerity policies grew louder. On November 10, 1966, the CDU/CSU parliamentary group nominated Kurt Georg Kiesinger as Chancellor, and on December 1, Erhard resigned.
On his 80th birthday on February 4, 1977, Erhard received numerous honors, and he passed away three months later on May 5 in Bonn due to heart failure. In line with his vision, the Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics in Fürth today researches governmental actions in light of new challenges. In honor of Erhard, the main lecture hall at the ifo Institute has been renamed the “Ludwig Erhard Hall.”
Beginnings
People
Celebrating Milestones: 25 Years of CESifo and 75 years of the ifo Institute
Marking a century of combined knowledge, the ifo Institute and CESifo are celebrating 75 and 25 years respectively – 100 years of scientific rigor influencing and shaping policy across generations. This year, under the banner “75 years of ifo - 75 stories,” we invite you to explore the rich history of economic research and policy advice. Throughout the anniversary year, we will spotlight key events, delve into the institute’s past, present, and future, and introduce the personalities, places, and pivotal moments that have defined our journey.
A Beacon of Economic Thought in Europe
Founded in the aftermath of World War II, the ifo Institute arose from the union of the Information and Research Center for Economic Observation and the South German Institute for Economic Research, established by Ludwig Erhard in 1946. Today, it is renowned for its top-tier economic research and policy advice, boasting an international reputation. “Our research provides the foundation for reliable analyses and data, empowering politicians, businesses, and the public to make informed decisions,” says ifo President Clemens Fuest at the start of the anniversary year 2024. “Our history began with economic monitoring via our own surveys. Today, for example, we are tapping into new data sources – big data – to be able to analyze and interpret economic developments more quickly.”
Legacy of the Founding Fathers Erhard, Schlesinger, Pohl
The institute’s operations began on March 1, 1949, with six full-time and twenty part-time employees, including future Bundesbank presidents Helmut Schlesinger and Karl-Otto Pöhl. The current name “ifo,” which stands for “Information und Forschung” (information and research), was added to the institute’s name only in 1950. By the autumn of 1949, the institute had launched its company surveys as an innovative method of economic and business cycle observation. These surveys would become the most important service and hallmark of the institute over the years: even today, they form the basis for the monthly published ifo Business Climate Index, a globally recognized indicator of Germany's economic development.
Expansion and Innovation
Since the German reunification, the ifo Dresden branch, established in 1993, has focused on the structural policy issues of the new federal states, particularly Saxony. In 1999, then-president Hans-Werner Sinn founded CESifo GmbH, creating a global network of over 2,000 economists, including several Nobel laureates. Affiliated with Ludwig-Maximilians-Universität München since 2002, the institute recently opened the Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics in Fürth in 2022. In 2023, the ifo Institute revamped the LMU-ifo Economics Business Data Center (EBDC), enhancing its focus on Big Data Economics, which serves as a central research hub for all ifo Centers, their research partners and guest researchers.
“Shaping the Economic Debate”
In addition to economic trends, the institute’s nine research divisions now explore contemporary issues such as climate change, geoeconomics, new technologies, and inequality. The insights gained resonate widely. They are not only discussed within the academic community and published in leading scientific journals, but we also make a concerted effort to cultivate our emerging scholars to ensure research remains at a high level. Moreover, we distill these insights for public discourse. Through media reports and other channels, the ifo Institute’s analyses provide vital information to engaged citizens, business leaders, and association representatives. Additionally, policymakers frequently consult the institute when making significant decisions, underscoring the practical impact of our research.
Beginnings
Impulse
CESifo: 25 Years of Growth
What underpins truly excellent research? Certainly, it involves engaging in meaningful exchanges with peers and effectively disseminating impactful findings. Such were the thoughts 25 years ago that, fueled by a vision from former ifo president Hans-Werner Sinn, gave rise to one of the largest research networks in economics. Today, as CESifo marks its silver jubilee, it continues to thrive and expand.
The Origins of CESifo
Every significant achievement begins modestly. A quarter-century ago, Munich wasn’t yet recognized as a hub for economic research. However, the Center for Economic Studies (CES) at LMU Munich attracted attention; its working papers grew in influence, drawing diverse groups of visiting economists. Inspired by this burgeoning interest, former ifo President Hans-Werner Sinn envisioned a network that would harness this momentum. The participation of 230 guest researchers, the burgeoning publication efforts, and the organization of pivotal research conferences became the cornerstones of what CESifo would represent. These foundational elements are still evident in CESifo’s operations today.
CESifo Today: A Synopsis of Growth and Influence
With over 2,040 economists from 46 countries, more than 11,000 working papers published, and upwards of 800 events attracting over 40,000 participants, CESifo has evolved into a premier, independent global research network in just over two decades. The network brings together distinguished economists across various specialties, each contributing years of experience and expertise. Its mission extends beyond fostering global knowledge exchange on economic topics; it aims to fortify the collaboration between the ifo Institute and LMU Munich and to sustain Munich’s role as a dynamic hub of economic dialogue in Europe.
Interested in learning more about CESifo and the team driving its success? Click below to watch our anniversary video, which offers a glimpse into the network’s events and highlights and introduces the people who are integral to CESifo’s operations. For further details, visit us online.
Network
The First Residents of one of the Triplet Houses: Bruno Walter and Bruno Frank
Bruno Walter and Bruno Frank were the inaugural residents of the ifo building at Mauerkircherstrasse 43, located in the today affluent residential area that forms the Herzogpark. Their remarkable contributions to Munich’s artistic scene and their warm intellectual exchanges with neighbors in Herzogpark, notably with the family of the legendary writer Thomas Mann, represent a unique chapter in Germany‘s cultural history, right until the national socialists came into power 1933. Since 1963, the ifo Institute has been the steward of this historic building.
Bruno Walter: Conductor and Homeowner
In 1913, the esteemed conductor and composer Bruno Walter acquired one of the so-called “Triplet Houses” designed by Munich architect Paul Böhmer in 1909. Despite facing overt anti-Semitic hostility as a Jew, Walter recalled the decade he spent in Herzogpark as “the most productive time of my life,” a period marked by “a surge of artistic activity.” He continued as Munich’s general music director until the fall of 1922.
Bruno Frank: Writer and Tenant
After moving to the Städtische Oper, “the Municipal Opera”, in Berlin in 1924, Bruno Walter leased his house to the artist couple Bruno and Liesl Frank. Bruno Frank, also of Jewish descent, was a pivotal figure in Germany’s literary scene during the 1920s and 1930s. Among his significant works from his Munich days is the “Political Novel” (1928), which explored Franco-German reconciliation post-World War I, drawing inspiration from the landmark meeting between foreign ministers Aristide Briand and Gustav Stresemann in Locarno in 1925. The novel was swiftly translated into five languages.
California Exiles from Herzogpark
In March 1933, following the rise of the National Socialists, Bruno and Elsa Walter fled to Austria, later moving to Switzerland in 1938, and ultimately settling in the United States. The Franks promptly left Munich after the Reichstag fire, a pivotal event in the rise of the National Socialist party, in February 1933. In 1939, an emotional reunion took place in Beverly Hills, USA, among the three families of Bruno Walter, Bruno Frank, and Thomas Mann. The friendships that had blossomed in Munich’s affluent Bogenhausen district flourished anew under the sunny skies of California, albeit under forced circumstances.
What became of the emigrants? Bruno Frank passed away in Los Angeles in 1945. The Mann family relocated to Switzerland in 1952, and Bruno Walter thrived in his new country, becoming the principal conductor of the New York Philharmonic.
Local History
The Herzogpark: A Cradle of Culture and Intellectualism
Herzogpark, nestled in the Bogenhausen district of Munich, serves as the picturesque locale for the ifo Institute’s headquarters. This elite residential enclave, steeped in cultural and intellectual history, has been a fertile ground for what is now an internationally acclaimed economic research center.
Founding of a Prestigious Neighborhood
Herzogpark is named after its original owner, Duke Max in Bavaria (1808-1888), the father of the later Empress Elisabeth of Austria, known as Sisi. His son, Archduke Karl Theodor, sold the expansive land along the eastern banks of the Isar River to the Terrain-Aktiengesellschaft Bogenhausen-Gern in the early 1900s. At that time, the duke's former hunting grounds were still wild, untouched nature, an impression of which is conveyed in Thomas Mann’s story “Herr und Hund.” The new development area was initially opened up by a long main street named after the Archbishop of Passau, Friedrich Mauerkircher, and later, the parallel Pienzenauerstraße was laid out, named after a Bavarian noble family. During World War I, construction was halted, and many plots along the streets of Herzogpark, often named after famous poets from Gellert to Stifter, remained undeveloped for a long time.
In the nascent days of Herzogpark, pioneers of art and intellect carved out a space where creativity and thought flourished. Ludwig Freiherr von Gumppenberg-Pöttmes-Oberprennberg, an early settler, established his residence in a grand villa at by 1906, signaling the area’s burgeoning appeal to Munich’s cultural elite. Across from him, Alfred von Heymel, a luminary in the literary world, set roots at Poschingerstrasse 5 in 1909, marking the area as a magnet for creative minds. The enclave also attracted figures like Robert Hallgarten, a scholar with a keen intellect, and his wife, Constanze Hallgarten, a stalwart in women’s rights and peace activism, who together contributed to the area’s intellectual vibrancy. Notably, Thomas Mann, seeking a conducive environment for his family and work, and Bruno Walter, a maestro with a passion beyond the podium, chose Herzogpark for its serene yet stimulating atmosphere. They were joined by Erich Marcks, a historian and Bismarck biographer, setting the stage for a neighborhood rich in dialogue and discovery.
Expansion and Cultural Flourishing
As Herzogpark’s reputation as a haven for the arts and intellect grew, it drew a wider circle of notables. The actor duo Herta von Hagen and Gustl Waldau, celebrated for their contributions to the stage, made their home here, adding to the neighborhood’s artistic flair. Ludwig Ritter von Zumbusch, a professor at the Academy of Arts renowned for his child portraits, moved into a villa designed by architect Otto Riemerschmid at 9 Schönbergstraße in 1910. The arrival of Leopold Stokowski, a friend and peer of Bruno Walter, underscored the area’s appeal to musical virtuosos. This period also saw Thomas Mann, celebrated for his literary work, moving into the notable Villa at Poschingerstraße 1 in 1914. Bruno Frank, another torchbearer of literature, along with the distinguished banker and bibliophile Otto Deutsch-Zeltmann, member of the “Society of Munich Book Lovers” and the Maximiliansgesellschaft, found in Herzogpark not just a home but a community of like-minded individuals. It was here too that Adolf Weber, an economist who significantly influenced the direction of economic research and policy in Germany, his involvement with the “Economic Working Group for Bavaria” and meetings held in his home in Herzogpark contributed to the foundational ideas that continue to inform the work of the ifo Institute.
A Place of Intellectual Exchange
The ifo Institute itself found a home in Herzogpark thanks to a tip from Adolf Weber about the building at Poschingerstrasse being for sale post-World War II. Starting in 1952, the institute’s staff worked here and later occupied spaces within Herzogpark’s iconic triplet villas, cementing the institute’s success story in an area renowned for its intellectual legacy. Today, the ifo Institute’s buildings still echo the vibrant intel-lectual and cultural history of Herzogpark and its esteemed past inhabitants.
Local History
The ifo Schnelldienst: Chronicles of a Leading Economic Publication
Whether as an economic barometer, a scholarly beacon, or a platform for vigorous debates, the ifo Schnelldienst has spotlighted economic policy issues like few other publications in Germany. To this day, it remains a crucial component of the ifo Institute‘s public outreach.
The Early Days: From Manual Efforts to Institutional Influence
The first issue was published by the Information and Research Center for Economic Observation, part of the Bavarian Statistical State Office, housed in a police barracks on Rosenheimer Straße 130 in Munich. In January 1949, this center merged with the South German Institute for Economic Research to become the Institute for Economic Research in Munich, shortly known as ifo. The origins of ifo’s “Schnelldienst” magazine trace back to six months before the institute's official establishment. By July 1948, the staff were already manually producing the first editions of the magazine on a duplicating machine, page by page, marking its official publication date as July 20, 1948.
Engaging with Post-War Economic Dynamics
The inaugural issue delved into the economic aspirations and realities of the post-war era, including the results from the first representative survey of industrial companies. This began the ifo business surveys, which have since become a cornerstone of the institute’s research. The publication also speculated on the reasons behind the sudden availability of goods in retail – whether it was a temporary post-currency reform effect or an indicator of burgeoning prosperity.
Analyzing current challenges in politics and the economy is still the core of ifo Schnelldienst today – its range of topics has expanded in many directions.
Editorial Oversight and Expansion
The significance of the ifo Schnelldienst to the institute is evident from the fact that a board member, Eduard Werlé, took over as editor-in-chief. The ifo Schnelldienst was the institute’s most crucial public relations tool; since 1999, when the initially quarterly, and from 1974 monthly, Wirtschaftskonjunktur publication was discontinued, it has also been considered the institute's flagship publication. Initially, the ifo Schnelldienst was intended solely to present “the most important results of our work” to the press, for a fee.
From Duplicators to Digital: A Journey of Modernization
Originally, the ifo Schnelldienst supplemented issues of Wirtschaftskonjunktur, differentiating itself with the subtitle „Wöchentlicher Kurzbericht zur Wirtschaftskonjunktur“ (Weekly Brief Report on Economic Trends). Initially still produced via hand-operated duplicators, each edition quickly landed on the desks of business editors and all members of the ifo Association, including ministries, universities, companies, and associations. This made the ifo Schnelldienst one of the most important sources of economic information in Germany and internationally. The switch from a hand-operated duplicator to a more modern offset printing press did not occur until two years later, with the establishment of its own in-house print shop in 1952 marking a significant advancement in the publication‘s production capabilities.
A Platform for Influential Voices and Debates
By 1954, the editorial team had structured the ifo Schnelldienst into fixed sections, which included the picture of the week, ifo notes, short commentaries, and articles on the economic situation. Subscriptions were then opened to anyone interested in economic issues, cementing the publication‘s role as a key platform for economic discourse. It quickly became evident among the Institute‘s staff that those with valuable insights or data should aim to publish in the ifo Schnelldienst. Between 1970 and 1976, the publication featured an average of 136 articles per year from various ifo contributors.
This publication has not only documented key economic policy issues in the history of the Federal Republic of Germany, like the Hartz reforms, EU‘s eastward expansion, and the euro crisis, but also marked significant milestones in the institute’s own history. Notably, the ifo Business Climate Index, a key tool familiar to news and business journalists today, made its debut here – albeit inconspicuously with just a three-line table in the 1971 issue showing the index’s development from January 1970 to February 1971.
A New Era of Dialogue and Digital Presence
Remaining faithful to its mission until the late 1990s, the ifo Schnelldienst underwent a significant transformation as the institute redefined its publication strategy. It embraced contributions from external authors and introduced the “For discussion” section in 2020, enhancing the visibility of ifo researchers and aligning with the institute’s modern communication strategy. Since then, this section has focused on topics covered by the ifo Institute. That same year marked the digital launch of ifo Schnelldienst, allowing for more flexible and frequent publications.
This digital expansion enabled the ifo Schnelldienst to publish articles outside the traditional monthly publication schedule, thereby increasing its responsiveness to current economic events and debates.
Publications
Upswing, Boom, Crisis: The Impact of the ifo Business Climate Index
The ifo Business Climate Index, published monthly, has become an essential tool for decision-makers in business, politics, and finance. But how did the ifo Institute conceive of measuring the business climate, and why do these figures captivate such widespread attention even beyond the business community?
A Pioneering Endeavor by the ifo Institute
The idea of assessing the German economy through surveys of company managers was initiated in 1948 by the “Information and Research Center for Economic Observation” of the Bavarian State Statistical Office, which later evolved into the ifo Institute. Following the currency reform in 1948, which drastically altered the economic landscape, there was a pressing need for dynamic indicators to complement traditional statistics. Gathering this data directly from entrepreneurs was a groundbreaking approach to empirical economic research in Europe at the time. Post its establishment in 1949, the ifo Institute refined this survey method, focusing not on specific company data but on qualitative assessments of companies’ own developments – a practice that remains central to ifo surveys.
In the 1960s, the institute in its extensive questionnaires increasingly concentrated on business climate indicators, synthesizing assessments of current business conditions with expectations for the next six months. This unique feature of the ifo Business Climate Index today allows for early detection of economic turning points.
In December 1971, ifo discreetly introduced its “Business Climate Manufacturing” index in the ifo Schnelldienst. At that time, its potential significance as a leading economic indicator was not yet recognized.
Four Sectors, Business Situation, and Expectations
Today, the ifo Business Climate Index is derived from about 9,000 questionnaires from companies across manufacturing, construction, wholesale, retail, and service sectors. The index calculates the difference in responses categorized as “good” versus “bad” for the current business situation and “more favorable” versus “less favorable” for future expectations. Neutral responses such as “satisfactory” or “unchanged” are excluded from the calculations. The final index is the mean of these balances, reflecting both present conditions and future prospects.
A Sample Calculation
For example, if 40 percent of surveyed companies describe their current situation as satisfactory, 35 percent as good, and 25 percent as poor, only the responses categorized as good or poor are considered. The difference – 10 percent in this case – represents the current business situation score. Expectations for the next six months are calculated similarly, and the ifo Business Climate Index is calculated each month as the average of the current situation value and the expectations value. The index can range from -100 (if all respondents view their situation as poor and anticipate worsening conditions) to +100 (if all view their situation as good and expect improvement).
Strict Protocol for Publication
The ifo Business Climate Index is one of the most closely watched indicators for assessing the German economy, capable of triggering movements in the financial markets. Therefore, its calculation and publication follow a strict protocol:
• At 7:00 AM, the results of the calculations performed the night before publication are sent to the Head of Surveys.
• By 8:00 AM, the Head of Surveys analyzes these results, considering sector-specific data like automotive industry trends important for the overall interpretation, and drafts a press release.
• At 8:45 AM, key personnel, including the ifo President, the Heads of Economic Forecasts and Surveys, the Head of Surveys, the Head of Communication, the press speaker and a translator discuss and finalize the press release.
• By 10:00 AM, the press speaker reads the release in a video conference. It is then distributed in multiple languages to news agencies accredited with the European Central Bank.
• At 10:30 AM, the index is published on the ifo website.
A Trusted Economic Barometer
The ifo Business Climate Index garners significant attention due to its timely correlation with actual economic trends, making it a reliable basis for strategic decisions in businesses, politics, and finance. Unlike statistics that may lag, such as quarterly GDP reports by the Federal Statistics Office, the ifo index offers up-to-date insights.
Participating companies benefit not only from contributing information but also from accessing detailed analyses unavailable elsewhere, underpinning the success of the ifo Institute’s flagship service.
Publications
Artificial Intelligence: Opportunity or Danger?
It is undisputed that the use of artificial intelligence is changing society, especially the world of work. However, there is great uncertainty about the “how.” Is its use more of an opportunity or more of a threat? On the one hand, there are expectations of greater efficiency, dynamism, and new business models. On the other hand, there are fears associated with these opportunities – for the economy as well as for society. Will AI become a job killer? Will AI even become uncontrollable due to its lack of traceability? A suitable framework for dealing with AI technologies is essential.
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
Brexit 2016: A Shocking Turn of Events and Its Consequences
Britain‘s relationship with the European Union has always been at arm‘s length. In the 2016 Brexit referendum, 72.2% of eligible voters participated, with 51.9% voting in favor of leaving the EU. This event marked the United Kingdom as the first country to exit the EU, leading to immense economic consequences, according to the ifo Institute. After a year of intensive negotiations, a new trade and cooperation agreement between the EU and the UK was enacted in 2021.
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.
Milestone
Bridging the Divide: Germany’s Economic Union
In 1990, Chancellor Helmut Kohl made a bold promise to transform the regions of Mecklenburg-Western Pomerania, Saxony-Anhalt, Brandenburg, Saxony, and Thuringia into thriving landscapes where people would want to live and work. Despite these aspirations, even three decades after the Berlin Wall came down, the economic vitality of former East Germany remained markedly below that of the West. The ifo Institute’s Dresden branch has been tracking this structural transformation since 1993.
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.
Milestone
Combating Poverty in Old Age: The 1957 Pension Reform
In the wake of the 1950s’ economic boom, a significant portion of the population, notably the 4.5 million pensioners, found themselves overlooked. In 1957, Chancellor Konrad Adenauer recognized an opportunity to engage a generation that had been previously overlooked, using comprehensive pension reform as a key strategy ahead of the upcoming Bundestag elections. Critics of the reform warned that the central feature – a solidarity-based intergenerational contract – would lead to significant financial challenges for future politicians, especially if birth rates declined, effectively creating a form of hidden national debt. However, Adenauer famously brushed aside these concerns, asserting that “People always have children.” The ifo Institute has actively participated in these discussions, tracing from the initial pension debate in 1956 through to contemporary analyses.
Urgent Calls for Reform
The Invalidity and Old Age Insurance Act, a piece of Bismarck’s social legislation introduced in 1889, provided basic security in old age or in case of occupational disability. However, to meet the full cost of living, individuals often had to dip into their savings or depend on family support. Despite the changing economic landscape, this pension system’s core principles remained unchanged through the post-war period, not accounting for rising prices and wages. Many lost not only their loved ones and savings during the war but also found pensions as their sole income source. The need for reform was clear, yet after initial promises in 1953, Konrad Adenauer’s government faced criticism for its slow action.
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.
Milestone
Tackling Recession: The Stability and Growth Act of 1967
After the prosperous years of Germany’s “economic miracle,” the first clear signs of a recession emerged. In response, on May 10, 1967, the German Bundestag passed the “Act to Promote Stability and Growth in the Economy” by a substantial majority. The Federal Government aimed to achieve four major objectives: full employment, price stability, external economic balance, and economic growth – collectively known as the “magic square.” The ifo Institute has consistently supported these measures with up-to-date data.
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.
Milestone
The End of a Dream: The Dotcom Bubble’s Collapse
In 1999, the stock market was ablaze with excitement: the Nemax 50, the leading index of the Neuer Markt (a segment of the Frankfurt Stock Exchange created for high-growth, high-tech companies, similar to the NASDAQ in the U.S.), made its debut. This period marked an era of fervent enthusiasm, with the dream of rapidly accumulating wealth through stock gains drawing many to invest, their imaginations captivated by the burgeoning possibilities of mobile communication and the internet.
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.
Milestone
The Financial Crisis: A Tumultuous Collapse 2008
The international financial crisis of 2008 originated from a national real estate crisis in the United States. For years, property prices soared while interest rates remained low, prompting U.S. banks to extend high-risk loans to households, further inflating the real estate bubble. The bubble finally burst when the U.S. Federal Reserve hiked key interest rates, leading to increased lending rates. As homeowners defaulted on their loans, banks faced a liquidity crisis that quickly rippled through the international financial system and broad sectors of the real economy.
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.
Milestone
The Founding of the ifo Institute: Bridging Science and Practice
The ifo Institute was born from the union of two pioneering institutions in January 1949. The merger of the Süddeutsches Institut für Wirtschaftsforschung and the Informations- und Forschungsstelle für Wirtschaftsbeobachtung created a hub that has profoundly influenced economic policy and research for over seventy-five years. How did this merger come about? Let‘s take a look at the complex history of the ifo‘s foundation.
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.
Beginnings
People
The Road to European Integration: The EEC’s Formation
The economic reconstruction of Europe post-World War II was intrinsically linked to renewed efforts towards European unification. This vision took a concrete shape with the establishment of the European Coal and Steel Community (ECSC) in 1951 by France, Germany, Italy, and the Benelux countries. This marked the initial step to-wards creating a common European economic area, laying the groundwork for the formation of the European Economic Community (EEC) in 1957. The ifo Institute provided in-depth analysis throughout this process, closely monitoring the unfolding integration.
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.
