Leading
German Economist on Corona Policies
“The Virus Must Be Contained Before the Economy
Can Recover”
In an interview, Clemens Fuest, one of Germany’s top
economists, discusses the impact of the coronavirus on governments and
business. He says bankruptcies are inevitable and that the effects of the
crisis will be with us for a long time to come.
Interview Conducted
by Martin Hesse und Michael Sauga
10.07.2020,
18.22 Uhr
Economist Clemens Fuest: "It will not be possible
to avoid insolvencies."
DER SPIEGEL:
Mr. Fuest, in recent months, the state has intervened in everyday life and in
the economy in an unprecedented way - with rules on the public’s behavior,
economic stimulus programs and subsidies. Was it all necessary?
Fuest: By
and large, the government has acted correctly, both in the fight against the
coronavirus and in terms of economic policy. In a crisis like this, the markets
don’t function properly, so the state should intervene. However, it is equally
important that politicians find a way out of the emergency measures once the
acute crisis passes. We have to be careful and make sure that we do not fall
into a state-controlled economy.
DER
SPIEGEL: Do you see that danger?
Fuest: Yes.
I think there is too much talk about public spending and too little about the
necessary freedom for the private sector. Our prosperity isn’t generated by the
state, but by entrepreneurs and workers. Things won’t be as smooth this time as
they were after the financial crisis, when the economy quickly regained
momentum.
DER
SPIEGEL: When the virus began spreading, the government froze large parts of
the economy. Was the lockdown excessive?
Fuest: No.
Experience from previous pandemics like the Spanish flu suggest that the
economic damage will be smaller if the disease is fought with determination. As
long as the spread of the virus continues, people reduce their economic
activities on their own. They consume and produce less because they are afraid
of infection. The virus must be contained before the economy can recover. The
contradiction between health and economic interests, which has been frequently
discussed in the corona crisis, doesn’t really exist.
DER
SPIEGEL: Nevertheless, many companies have accumulated gigantic losses and now
have to be rescued by the state, through loans or direct equity investments.
Are we facing a kind of corona socialism?
Fuest: I
hope not. It may be right for the state to take a stake in certain companies to
save them from bankruptcy. But the government should then also impose
conditions - that companies temporarily can’t pay out dividends, for example.
It would be wrong for the state to interfere in operational business.
DER
SPIEGEL: But the state is now the new co-owner. Doesn’t it have the duty to
press for environmentally friendly production methods, for example?
Fuest: No.
If the state wants to protect the environment, it must impose conditions that
apply to all companies, not just those in which the state holds shares. It is
right to limit executive bonuses (Eds: As the German government has done in
firms it has bailed out in the form of share purchases.) However, setting
political guidelines for day-to-day operations isn’t the right course of
action.
DER
SPIEGEL: Lufthansa is receiving around 9 billion euros from the state and wants
to cut 22,000 jobs at the same time. Doesn’t the government need to prevent
something like that?
Fuest: The
state should not guarantee jobs if the business model no longer works. There
are indications that people will not fly as much after the crisis. Lufthansa
must prepare itself for this, also by cutting jobs. If you believe the
government, it wants to sell its Lufthansa shares as quickly as possible. But
it will only be able to do that if the company is economically sound.
About
Clemens Fuest
Clemens
Fuest, 51, has served as president of the ifo Institute for Economic Research
since 2016. In his newly released book, "How We Can Save Our Economy,”
published in German, the economic liberal analyzes the consequences of the
global pandemic and lays out a road map for the best way Germany can deal with
it.
DER
SPIEGEL: The state has also invested in the vaccine manufacturer Curevac. Did
that make sense?
Fuest: No.
Curevac is a healthy company. There was no threat of insolvency nor of a
takeover.
DER
SPIEGEL: Federal Economics Minister Peter Altmaier wants to secure access to a
possible corona vaccine and also make sure that a promising high-tech company
stays in Germany and is not purchased by a foreign buyer. Is that not reason
enough?
Fuest: The
German government just tightened up a law that allows it to prevent foreign
takeovers. That could be used if it became necessary. If the state is concerned
about vaccine supply, it can negotiate the relevant contracts. In this
instance, a state holding here is not the right instrument because it could
distort competition.
DER
SPIEGEL: Isn't it nevertheless correct for Altmaier to be seeking to secure the
supply of vaccines, medication, protective equipment and masks?
Fuest: It
was certainly a failure that there wasn’t enough protective clothing and masks
available in Germany when the pandemic broke out. But that also doesn’t mean
that the government should buy up companies for that purpose.
DER
SPIEGEL: The German government wants to become less dependent on China for
medical supplies and ensure that more production takes place in Germany. Is
that smart?
Fuest: You
shouldn’t conflate domestic production with supply security. Even in Germany,
an epidemic can explode or manufacturing can be halted for other reasons, in
which case domestic production is of no use at all. It is better to ensure that
there are several suppliers from different countries.
DER
SPIEGEL: Global trade has further weakened as a result of the crisis. Supply
chains have been fractures and protectionism is on the rise. Does it not make
sense to make the economy more nationally focused?
Fuest: On
the contrary. The solution currently lies in more globalization, not less.
Those obtaining their primary products from a single source in China would be
wise to acquire additional suppliers in Vietnam, India or Mexico. Just as it is
advantageous to deliver your products all over the world, rather than limiting
yourself to one buyer. After the financial crisis, German industry benefited
from the ability to sell cars and machinery not only in the weakening Eurozone,
but also in the booming markets of China and North America.
DER
SPIEGEL: The German government has launched a 130-billion-euro economic
stimulus package to boost the domestic economy. Is that enough?
Fuest: It
is the right move for the government to give the economy a boost again after
the virtual standstill in the spring. But we shouldn’t expect too much from it.
It is estimated that the measures will increase economic output this year by
only about one percentage point. The coronavirus crisis has led to a sharp
decline in production. No economic stimulus package can make up for that loss.
DER
SPIEGEL: Finance Minister Olaf Scholz spoke of a program that would "pack
a lot of punch," and Economics Minister Altmaier promised that no company
would go bankrupt because of the coronavirus crisis. Too much bluster?
Fuest:
There is a rhetorical gray area between wish and reality. I have a certain
understanding for the fact that politicians want to spread optimism during a
serious crisis. What would we have said if the ministers had speculated at
length about how terrible everything would be?
DER
SPIEGEL: That is exactly what economists are doing these days. They are
predicting a wave of bankruptcies in the autumn.
Fuest: It
will not be possible to avoid insolvencies, but it remains to be seen whether
there will be a wave of insolvencies. The hope that the fast crash would be
followed by an equally fast rebound was overly optimistic. We have to accept
that the crisis will last a long time and that jobs will be lost. Even
(Germany’s) Kurzarbeit (government-subsidized work furlough) program cannot
prevent this entirely.
DER
SPIEGEL: What do you mean?
Fuest: The
Kurzarbeit program ensures that employees remain in their current jobs. That’s
good if the economy looks about the same after the crisis as it did before. If,
however, there are fundamental changes, because fewer flights are flown after
the coronavirus, for example, then furlough programs can also impede necessary
changes.
DER
SPIEGEL: During the crisis, the government decided to extend the work furlough
allowance. Was that the wrong decision?
Fuest: No,
the idea was to provide security to the affected people and to promote consumer
spending. But the longer the crisis lasts, the more imperative it becomes to
allow for structural change.
DER
SPIEGEL: What can the government do?
Fuest: It
could promote training and the creation of new companies. It could reduce
bureaucracy for companies and lower their tax burden.
DER SPIEGEL:
Many companies currently aren’t generating any profits anyway, so what’s the
point of tax breaks?
Fuest: In
the current crisis situation, the focus should be on loss compensation and
accelerated depreciation. But it terms of perspectives, it is important that we
reduce the corporate tax to 25 percent and announce the change quickly, as many
countries around us have done.
DER
SPIEGEL: Once the crisis is over, the first thing we need to do is reduce
sovereign debt. Wouldn't that speak for higher taxes?
Fuest: When
economic growth returns, the national budget will receive automatic relief. If
that isn’t enough, then both expenditure cuts and higher taxes will have to be
considered. But then it’s not corporate or income taxes that should be raised,
but rather the VAT or property taxes, which are less hostile to growth.
DER
SPIEGEL: In the crisis, small incomes are proving to be the main burden. And
you want to increase the value-added tax, which puts a particular burden on
low-income earners?
Fuest: It will
only do so if it is passed on to consumers in the form of higher prices. But we
are seeing, particularly with the reduction in VAT, that this is only happening
to a very small extent. Nevertheless, social transfers like the amount paid
through Germany's Hartz IV long-term welfare program should be increased to
offset the burden created by a VAT increase.
DER
SPIEGEL: Will the coronavirus crisis increase inequality?
Fuest: It
is expected that the crisis and accelerated structural change are likely to cause
an even greater divergence between the incomes of high- and low-skilled workers
than before. However, this cannot be offset by the tax and transfer system
alone. Instead, we need to invest in the school and education system. We need
programs that empower workers to succeed in a more digitalized world, and we
need more schooling for people from less educated backgrounds.
DER
SPIEGEL: Some 750 billion euros are to be funneled through the European Union
recovery fund to countries especially hard hit by corona. Is this the right
instrument?
Fuest: I am
in favor of the fund. It is right to show solidarity now, but the aid should
support reforms that strengthen growth and employment.
DER
SPIEGEL: Is there enough willingness to reform?
Fuest: We
have to wait and see what reform plans the countries applying for aid present.
But we shouldn’t fall into the old mistake of wanting to govern individual
member states from Brussels. The economic problems can only be solved from
within the countries themselves. It is therefore best for them to present
reform programs themselves. Italy has already announced a package of reforms
that contains some very promising elements, including more public investment
and less bureaucracy.
DER
SPIEGEL: Will the recovery fund be enough, or do you expect a new euro crisis?
Fuest: The
fund is a help, but it cannot change the fact that some countries in Europe –
Italy in particular – are experiencing difficulties because they have had
little growth at all for years and their already high sovereign debt loads have
risen again as a result of the crisis.
DER
SPIEGEL: How can these countries get out of the debt trap?
Fuest: The
ideal way would be to grow out of debt. If that doesn't work, it will be
difficult. A debt cut would be conceivable, but in Italy's case it would
primarily mean losses for domestic savers. It would also be possible to reduce
part of the debt by introducing a temporary wealth tax, possibly limited to
real estate, to prevent capital flight. That would cause a further slump in
economic growth.
DER
SPIEGEL: At the moment, the European Central Bank, with its low interest rates,
is ensuring that the country's sovereign debt load is sustainable. Can this
work in the long term?
Fuest: The
ECB's low interest rate policy can continue for a long time, unless inflation
returns.
DER
SPIEGEL: So, you still have faith in the idea that the ECB would actually raise
interest rates then?
Fuest:
There is cause for concern that the ECB might hesitate to take action against
rising inflation, especially given the tremendous political pressure there
would be to keep interest rates low. However, that cannot be sustained for
long. A policy of low interest rates despite rising inflation would cause
investors to sell government bonds en masse. That’s why it is dangerous to
expect central banks to help highly indebted countries. So far, though, there
are no concrete signs of impending inflation.
DER
SPIEGEL: Mr. Fuest, we thank you for this interview.
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