Ifo President Economist: Europe Must Get Tough with Trump

In an interview with Handelsblatt, leading economist Clemens Fuest says Germany must protect free trade, and will have to push back against President Trump’s drive to protectionism.
Quelle: dpa
Clemens Fuest, president of the Ifo Institute for Economic Research.
(Source: dpa)

Clemens Fuest became president of Munich’s prestigious Ifo Institute for Economic Research just 10 months ago, after many years teaching at Oxford. At Ifo, he has strengthened his role as one of Germany’s best-known public economists, a widely respected voice on questions of economic policy and regulation.

Mr. Fuest clearly believes in the power of rational argument: speaking to Handelsblatt, he was quietly-spoken and reflective. But on the subject of Donald Trump, he was firm, suggesting Europe needed to push back against his damaging economic policies.

The German economy was going through an enviably good period, he said, but there were three major problems on the horizon. The first was the country’s great dependence on exports, an apparent strength but actually a weak point with the increase in protectionism around the world. The second problem was demography: Germany’s aging population threatened to reduce growth and would challenge social systems. Third, said Mr. Fuest, was the still-unsolved crisis of the euro.

With federal elections due by September this year, the impact of politics on the economy is now a major issue in Germany. In the last two weeks, the center-left Social Democrats, or SPD, currently junior coalition partners to Angela Merkel’s center-right Christian Democrats, announced a change in leadership, appointing Martin Schulz as their election candidate for chancellor.

Mr. Fuest said it was good news that the SPD had solidified their support for free trade. However, he said he feared this election, like the last “will be mostly about redistribution and less about wealth generation.” The SPD could campaign for a new wealth tax or an increase in inheritance taxes, he added.

Unfortunately, it seems Trump really means it about tariffs and trade deals. It is very dangerous for German business. Clemens Fuest

Increasing taxes would not help reduce support for populists, said the 48-year-old economist: populism was driven by fears of immigration, not a desire for redistribution, so taxes would not help to take votes from parties like the Alternative for Germany, the right-wing populists currently doing well in the opinion polls. Inheritance tax could be reformed to make it fairer, he said, but simply raising the tax would undermine the business stability Germany needed for wealth creation.

In recent public positions, the Social Democrat leadership has also hit out at excessive executive salaries and benefits. The question has come back into the headlines recently thanks with news of the lavish pension paid to Martin Winterkorn, the former Volkswagen CEO forced to resign in 2015 over the Dieselgate scandal.

Mr. Fuest said actions like salary caps only dealt with effects, not causes. Good corporate governance was key, he said: it was better that the government keep out of the issue, and instead allow shareholders more input on executive salaries. More broadly, he observed that “oddly enough, politicians aren’t too bothered about million-dollar salaries for footballers, which are ultimately paid from public television money.”

Mr. Fuest said education was key to maintaining equality of opportunity in Germany: the country’s dual education system was the envy of the world, but early-years education was crucial to safeguard access for bright children from poorer backgrounds. But this investment goal was not worth risking Germany’s balanced budget, a major political achievement of recent years. If money was short, then redistributive policies—like the controversial decision to lower Germany’s retirement age to 63—were primarily to blame. Economic growth and low interest rates had brought about the balanced budget, not public thrift. That meant that public spending was still on the high side, he suggested.

03 p52 Germany in Numbers 1-01

The current coalition had been fairly successful: if he had to grade it, he would give it a C, said Mr. Fuest. Like doctors, governments should prioritize “not doing any damage,” and in this the coalition had done well, he added. But its economic success was built on the back of low oil prices, low interest rates, and a low-value euro, all of which benefited Germany.

Claims that Germany benefited from artificially-cheap exports because of the European currency were recently made in remarks by Peter Navarro, trade advisor to president Donald Trump. Mr. Fuest said there was some truth in this, but the fact did not impact the United States, as the Trump administration suggested. In the long term, he said, Germany’s large export surplus should be gently brought down.

Europe needs a real deterrent. The European Union will have to bare its claws with Trump. Clemens Fuest

Mr. Trump could definitely be a danger to the German economy, said Mr. Fuest. “Unfortunately, it seems he really means it about tariffs and bilateral trade deals. And that is very dangerous for German business,” he added. There had to be dialogue with Mr. Trump, but this should not be done in public, which risked “throwing petrol on the fire.” Instead, a tough line should be taken in private, ultimately in order to avoid a trade war. “That can only happen if Europe has a real deterrent. The European Union will have to bare its claws with Trump,” he added.

Many indicators suggested we might be coming to an end to the era of globalization. But above all, political shifts—like Brexit and the election of Mr. Trump—were pushing in that direction, he said.

Given how much Germany relied on open, trading economies, he added, it should not accept this lying down: “We have to intensify exchange with countries which want to defend free trade, like Canada, Mexico, Japan, and China.” In addition, domestically-focused sectors, like health care and renewable energies, should be given particular support, he added. Any public push to save free trade should above all come from politicians: interventions from senior executives might not help the case, he suggested.

Above all, Europe needed to stick together in the face of new challenges. If the election of Mr. Trump did not serve as a wake-up call, the reality of Brexit just might, he said. It was crucial that a satisfactory deal was worked out with Britain. Their attempt to cut a deal with Mr. Trump may have been forced on them by European politicians’ hostility, he said. But now “it is in the interest of all European countries, including Britain, to minimize the economic and political fallout from Brexit, and to avoid deeper divisions in Europe.”

 

Jens Münchrath is based in Düsseldorf and heads Handelsblatt's coverage of economics and monetary policy. To contact the author: [email protected]