International Economics and Economic Outlook After the sovereign debt crisis in the euro area and the Brexit referendum, priority must be given to putting economic policy in Europe on an optimal course without setting the wrong long-term incentives. One of the key questions is whether deeper integration is really essential for bringing stability to the euro area. Moreover, the EU needs to sort out its future, particularly regarding issues like a more variable geometry, the EU budget and its regional policy.
In addition, our researchers analyse the business cycle and investigate other macroeconomic issues. For example, given the demografic change and the currently slow productivity growth, we examine the prospects for growth and investment in Germany, Europe and the world. This is an issue closely connected with the future viability of the German business model with its heavy bias towards exports.
The economists in this research unit also take an active part in economic policy debates, be it discussion of the German current account surplus, Germany’s attractiveness as a location for investment or the threat to open markets by Brexit and Trumponomics.
Sections of the Research Unit
- Euro area governance: A current priority is to provide policy advice for the reform of the euro area - based on the right incentives for sound economic policymaking.
- Economic outlook and structural change: The research unit leads and contributes to the IW’s semi-annual economic outlook for Germany and the international economy. Furthermore, we analyse economic growth and structural change from a macroeconomic perspective.
- Globalisation, trade, competitiveness: Current topics in this policy area include Brexit, the consequences of globalisation, as well as German and European competitiveness.
Findings and positions
- Euro area governance: Further fiscal integration does not appear necessary for EMU. Several reasons support this notion: The legacy of the atypically deep euro debt crisis (e.g. weakness of credit supply and investment) can be tackled by exceptional, but temporary measures, e.g. by the ECB and the EFSI. Moreover, in recent years, many important reforms have been adopted on the level of the euro area. These reforms must be thoroughly implemented. If the current political EU Commission is hesitant to do so, an independent advisory fiscal board should monitor whether the EU treaties are adhered to and issue recommendations to which the EU Commission has to react in a “comply or explain” mode. Certain additional reforms are needed to make EMU sustainable. For example, the European Semester should be strengthened so that country specific recommendations are reliably implemented. Also, orderly procedures are needed for over-indebted states and for countries which are unwilling to stick to the conditionality principle.Structural reforms: The strategy of the euro rescue fund has proved right. Based on the principle of conditionality, the stressed euro area countries have taken significant structural reforms. These reforms will foster convergence among euro area countries again, because they will reinvigorate economic growth and competitiveness - as clearly shown by Spain and Ireland. Structural reforms also make EMU more viable because they render wages and prices more flexible and increase the homogeneity among euro area members. Both aspects are important preconditions for sharing a single currency.
- Macroeconomic imbalances: The discussion about the German current account surplus continues. Indeed, Germany should increase public infrastructure investment and improve the general conditions for business investment. However, several reasons support the notion of a moderate structural surplus of the German current account. For example, the specialisation of the German economy in investment goods and the demographic challenge which is particularly large in Germany. Moreover, German unit labour costs have increased considerably in recent years in a booming labour market, which still benefits from the supply-side reforms of the preceding decade.
- Globalisation, WTO and TTIP: Open markets are essential for a dynamic global economy. The WTO is best suited to combat protectionism and to foster trade liberalisation. This appears all the more necessary since protectionism is on the rise, in particular regarding the new trade policy course of Donald Trump, but possibly also with regard to Brexit. At the same time, the legitimate concerns of globalisation sceptics and the problems of losers from more economic integration can and need to be sufficiently addressed.
- Structural change and welfare: The economic structures in advanced economies have experienced significant changes in previous decades. As a rather unique case, Germany has displayed a more or less constant (high) share of manufacturing since 1995. However, there is no clear relationship between sector shares and welfare implications (figure). To be successful, it is crucial that countries enable their businesses to integrate into international value chains with innovative solutions. Moreover, production factors need to be continuously (re-)allocated to modern and efficient uses. This requires open markets and non-discriminatory economic policies.