Mr. Fuest, the Ifo business climate index as a barometer for economic development rose for the fifth time in a row in September, from 88.8 to 89.9 points. How do you see the result?
This is a clear recovery in the German economy, and in this respect it is really a positive development that has now been confirmed over five months. At the same time, we must not forget that we come from a deep valley. So it's an improvement, but we still have a way to go before we can say it's a celebratory mood.
The five leading economic research institutes have increased their growth forecast for this year from 0.6 to 1.3 percent. What's going better right now?
In industry, of course, the entire defense industry is doing better. This also leads to orders from suppliers and is driven by government spending in this area. Then we have industries like the electrical industry, which benefits from the fact that data centers are being built and many companies are investing in digitalization. In addition, exports are doing better.
How sustainable are the growth effects from the defense industry?
This is a critical question. The state is currently expanding its spending financed by debt. This almost mechanically drives up growth in the year in which this happens. It is important that this spending generates long-term positive momentum by channeling it into investments, for example in infrastructure. In the defense sector, we can expect positive economic effects if we invest in research and development and not just buy established products such as soldiers' boots, rifles and tanks. Otherwise we will end up with higher debts and declining growth again and say: That was just a flash in the pan.
An important export driver is currently trade within the EU. Electrical and digital industry exports to the EU rose by 17 percent from January to July. Is this a sign that the great hope, the EU internal market, is gaining momentum?
We have had a functioning internal market for industrial goods for a long time. It has always been the most important export market for the German economy. Now perhaps it becomes clear once again how important it is when there are problems in other traditional markets such as China or the USA. There is still great potential in the European internal market, especially in the services sector. We have not yet fully exploited this potential.
So the current export figures do not yet show a new boost for the entire internal market?
Exactly. The European Union is not such a dynamic economic area. Things are going a little better in Eastern Europe than in the rest of Europe. Nevertheless, it is the most important market in the world for us. You trade the most with your neighbors.
According to your institute, the financial stimulus, for example in the defense industry, will amount to almost 40 billion euros this year. This corresponds roughly to two thirds of the expected growth of 1.3 percent. Is that good or bad?
That's fine for this year. But it shows that it is not a self-sustaining upswing, but rather a costly one. We will have interest burdens from this debt in the future. This will cause considerable difficulties for the federal budget. We won't have this stimulus next year - or we'll have to increase the debt again. What is currently missing is the private investment we need to make this recovery sustainable.
Growth of 1.1 percent is still forecast for 2027, although the fiscal stimulus from the state is expected to be lower at around 27 billion euros. Doesn't that suggest an improvement in the situation?
That is the expectation. But a forecast is ultimately a scenario. We expect that private sector activity will also be stimulated and private investments will increase. We'll have to wait and see whether that actually happens. And 1.1 percent growth with so much tailwind from government spending isn't overly impressive.
However, the higher growth forecasts are surprising given the conflict between Israel and the USA with Iran. The Strait of Hormuz is still barely navigable, and there are also battles with the Houthis in the Red Sea. This makes energy more expensive, among other things. Why is the German economy coping better than the institutes expected in the spring?
Many companies have adapted to the situation and are adapting. We underestimated the possibilities. It is a surprise that the economy is reacting so robustly. And energy prices may not have risen as much as one might have feared because we are no longer in the 1970s, when most oil actually came from the Middle East. Today there are more oil producers. But if the situation on the Red Sea gets worse, we will have further problems.
The increased growth forecasts are encouraging, but there is still a lot of catching up to do after weak years. According to the forecast, we could have achieved this by mid-2027 and then be back at normal capacity of the economy. Is there a risk of a rude awakening because the catch-up effects have fizzled out and potential growth is approaching zero?
That's exactly how it is. We have a shrinking workforce because more people are retiring than entering the labor market. This is a headwind for growth. We can only overcome this if we do more in other areas. There needs to be more investment and we need to get better at innovation. If we want more growth in the long term, we have to do something about the labor supply. Above all, we have to create conditions under which it is more interesting for private investors to get involved with us.
And in this situation, after the poor performance in three state elections, the federal government is discussing watering down its agreed reform package, for example allowing the pension to continue at 63.
It is fundamentally legitimate for politicians to carefully discuss structural reforms. But we have to spend less on pensions because we have fewer young people. Even after the planned pension reform recommended by the Commission, some things are being postponed. The baby boomers who are retiring during these years will largely be spared. High burdens are already being placed on the younger generation. Watering down the reforms further now is really a danger.
At the time, you supported the special fund and the easing of the debt brake.
As in the private sector, debt can be a tool to generate wealth if you invest the money in a way that generates higher returns than you pay interest. This also applies to the state. But if you use up the money, the only thing left is higher interest rates in the future. The money must be spent well.
Keyword spending money well: What's the point of a fuel discount?
Nothing. It reduces the burden on drivers, which increases the larger the car is and the more you drive. Politicians have to think about who they want to relieve. It would be understandable to relieve the burden on people who have to commute far to work and only have a car. But this should be done through the commuter allowance and not through a tax cut across the board. In my opinion this is a crazy idea. This should be left alone.
