Germany’s leading economic research institutes have launched fundamental criticism of the federal government, pointing to a lack of long-term vision on pensions and energy as well as costly and “counterproductive” measures such as the fuel discount. On the key issues of demographic change and energy supply, there is not even the beginnings of a clear vision, the institutes said, while accusing the coalition of going “off track” with its fiscal policy. The economists also see the growing influence of populist politics following Germany’s latest election results as a potential risk.
The government must address the “major challenges” of demographic change and energy supply “sensibly”; otherwise, the situation and mood among German companies will not improve sustainably, said Oliver Holtemöller of the Halle Institute for Economic Research (IWH) at the presentation of the joint economic diagnosis by Germany’s economic research institutes on Thursday.
The ageing population is causing “social security contributions to continue rising”. At the same time, the federal government’s pension reform “overall results in an increase in the burden of contributions”, Holtemöller said.
The criticism of energy policy was even sharper. There is “not even the beginnings” of a vision for how the energy transition can be carried out in line with Germany’s Climate Action Act, Holtemöller said. It is not clear “which measures, which reforms, which framework conditions” Germany intends to use to move away from fossil fuels, he said.
Ifo economist Timo Wollmershäuser also sees too strong a focus on “existing industries”. “These are, of course, the ones that naturally have the biggest lobby and are the loudest,” he said. “But it is somewhat overlooked in the overall economic policy strategy that a great deal of new activity is currently emerging.” He said this is also reflected in the number of new business formations.
The economic institutes see the fuel discount as a symptom of misguided spending policy. “It is ultimately a gift,” Wollmershäuser said. Many people who do not need the support would benefit from it. “It would be much more sensible to take a targeted approach,” he said. Holtemöller described the fuel discount as “economically counterproductive” because fuel is being artificially made cheaper despite limited supply.
Overall, the economic experts also see no need for additional relief measures. “Disposable household incomes are on an upward trend,” Holtemöller said. “The inflation of recent years has also been more than offset by wages.” The economic institutes’ joint forecast does identify subdued consumer sentiment in Germany as a problematic factor for the German economy. However, they primarily attribute this to the poor mood in the country.
“There simply needs to be an environment in which people once again have confidence that things will continue sensibly in this country,” Holtemöller said. “That seems to me to be the biggest problem at the moment.”
Looking at Germany’s latest elections, the economic research institutes warned of “a policy that is increasingly shaped by populism in some areas”, particularly on migration. Because the potential workforce is shrinking, Germany needs to remain open to “immigration of qualified workers”, Holtemöller said. There are now studies showing that “where populist forces are in government, economic development is weaker than in other regions. And the most important channel is openness,” he said.
The experts also warned that political uncertainty could put the economic policy reform agenda at risk. The AfD emerged as the strongest party in Sunday’s state election in Mecklenburg-Western Pomerania, while the Left Party won the election to Berlin’s House of Representatives. The CDU and SPD, which are part of the federal government, suffered significant losses in support.
The position of Federal Chancellor Friedrich Merz (CDU) has been weakened, while within the SPD there are growing questions about the federal government’s reform course. Thorsten Schmidt of the Leibniz Institute for Economic Research (RWI) said it was “urgently necessary” to stick to the announced reforms and “also implement the cuts and savings measures where they were announced”.
“There is no way around making tough decisions,” Holtemöller also stressed. Otherwise, he sees a “major danger” that Germany will take on too much debt, which would lead to a “stability problem in the euro area”.
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