IMFS Policy Lecture with Prof. Veronika Grimm (GCEE)
The state of the German economy does not inspire hope. "It can be assumed that we will experience stagnation this year," said Prof. Veronika Grimm, member of the German Council of Economic Experts, at the IMFS Policy Lecture on February 20. However, there is also a threat of weak growth in Germany in the longer term. In her lecture, Grimm explained how this can be overcome and which factors play a role in this.
Potential growth is at a historic low, as Grimm explained. An increase in labor productivity is therefore necessary. "Demographic trends, namely the retirement of the baby boomer generations, are causing a significant drop in the volume of work, which is having a negative impact on the development of production potential." Investment and innovation are the starting points. "If nothing happens in terms of investment, we would grow by around 0.4 percent per year. That is of course little compared to the roughly threefold growth we achieved in the 2010s."
Migration could also support the volume of work. However, it is unrealistic to rely so heavily on migration that this alone could offset the decline."We need to improve integration into the labor market".In the report, the members of the Expert Council therefore also refer to increasing the participation of women in the workforce. This is because women are more likely to work part-time - regardless of whether they have children or not, according to Grimm. In her view, better childcare, an adjustment to the splitting income taxation for spouses and greater appreciation of mothers working full-time are decisive factors in making a higher number of working hours more attractive.
In addition, the Council of Experts advocates a reform of the basic income support system that creates greater incentives to work and reduces transfer withdrawal rates "The system is very difficult to understand". A reform is also necessary for old-age provision. According to the annual report of the German Council of Economic Experts, it would be appropriate to adjust the retirement age to reflect longer life expectancy, combined with the adjustment of the sustainability factor and the adjustment of existing pensions to the inflation level instead of the wage level. In normal times, existing pensions would then not rise as much as wages. However, Grimm opposed the Expert Council's proposal to redistribute within the statutory pension insurance scheme. As she pointed out, not all capable groups of people, such as the self-employed and civil servants, are integrated into the statutory pension insurance scheme.
Nevertheless, greater inclusion of women and immigration are not enough to remove obstacles to growth. Investments should support structural change.Some of this would happen by itself. "More and more companies will replace labor with capital goods." Microdata shows that automation is particularly well suited to the automotive, chemical and pharmaceutical industries. This would free up workers to work in other sectors.This is where Grimm sees a need for politicians to create new opportunities for employees through appropriate further training and retraining."Up to now, further training has tended to take place within companies."
With regard to technical progress, which goes hand in hand with investments, it is also important to focus on areas where productivity progress is higher when investments are made.On the other hand, it is very difficult to predict the growth potential of phenomena such as artificial intelligence. A look back shows "that digitalization has not brought that much growth."
Furthermore, Grimm called for a more global approach to the green transformation.Within the EU, the additional production of hydrogen could otherwise drive up the price of electricity. "There are many more countries around the world that can produce hydrogen at favorable conditions and then sell us derivatives than countries that sell fossil fuels." The German economy should take advantage of this competition together with its European partners on its way to the goal of replacing energy-intensive primary products.
