The German economy is running at a slow pace. In an interview, economist Hans-Werner Sinn explains why – and what he thinks the traffic light government needs to do differently.

The Chancellor, Economics and Finance Ministers can no longer agree on a common therapy for a country that is suffering from a backlog of reforms and stunted growth. The equally clever and ruthless analysis by Prof. Hans-Werner Sinn should therefore only be useful to all three. Here are the key questions and the answers that are uncomfortable for the government:

Pioneer: The German economy is running at a slow pace. Why are we at the bottom of the list of industrialized nations in terms of growth?

Prof. Sinn: We Germans have ruined the energy transition by looking for and finding ways that simply make energy expensive. But energy is necessary to move the wheels of industry.

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Pioneer: Electricity prices for industry have fallen noticeably again from their all-time high after the attack on Ukraine. That is not enough?

Prof. Sinn: Others have also experienced this decline in electricity prices. But we not only need cheap electricity, but also reliable electricity. We don’t have that at the moment. On March 7th, the Federal Audit Office found that the federal government was pursuing a course that was unrealistic in terms of security of supply, literally.

Pioneer: That’s why 20 new gas power plants are now being built.

Prof. Sinn: We have chosen a path that involves double structures. The government basically cannot shut down a single power plant without endangering the security of supply. These facilities and their workforces have to stand their ground when the wind doesn’t blow and the sun doesn’t shine. That makes the German route very, very expensive.

Pioneer: The government still shut down the nuclear power plants. Right or wrong?

Prof. Sinn: That was a completely pointless policy. There is a power plant revival all over the world. The French are building lots of new ones. The internet giants are pouring their money into researching and building these new types of reactors. And Germany is destroying the old ones. This is hardly comprehensible.

Pioneer: Economics Minister Robert Habeck sees the world differently. The reason for our low growth, he says, is that the state is not investing enough. So: get rid of the debt brake and initiate more state investments? What do you think of that?

Prof. Sinn: That is economic nonsense. It is believed that economic resources can be conjured up out of thin air. If the state invests more, it withdraws funds from the private sector and therefore puts a strain on the capital market. This leads to higher interest rates. If you really want Germany to invest more, you have to change the local conditions so that companies invest voluntarily.

Pioneer: German climate policy is trying to reduce the demand for fossil fuels with a variety of measures. Does this strategy work?

Prof. Sinn: The oil sheikhs have produced on a linear, slightly increasing path for the last 40 years and have not been deterred by unilateral demand restrictions in parts of the world. Everything that comes out of the earth has been and will continue to be burned. If you want to prevent more CO₂ from getting into the air, you have to get less out of the earth. All the rest is idle.

Pioneer: The debt brake is firmly anchored in the Basic Law. How should we finance additional spending, such as the billions demanded by Defense Minister Boris Pistorius for Ukraine?

Prof. Sinn: We have to raise taxes to pay for armaments or we have to cut social spending. So the good Lord is not helping us here. We finally have to realize that we have resource limitations. The resources are only available once.

Pioneer: So you recommend tax increases?

Prof. Sinn: No, the state already receives so many taxes. We have developed the welfare state very strongly. There’s so much that’s wrong. Think about citizen’s money.

Pioneer: What exactly is going wrong?

Prof. Sinn: Citizens’ money costs an incredible amount of money and establishes the state as a competitor in the labor market. The state must help people get into the economy and not just get money without working.

Pioneer: We live in the social market economy. What kind of welfare state do we need?

Prof. Sinn: You have to have a welfare state where the state supports people who don’t earn enough to live adequately. But not on the condition that they stop working themselves. But on the condition that they do what is possible themselves and earn a basic income themselves. Anyone who wants to work must be able to work and then have enough to live on. But this is only possible with an activating social policy, where social benefits no longer have the character of a reward for doing nothing.

Pioneer: The devaluation of money still worries us. Is inflation really on the decline?

Prof. Sinn: Yes, it is on the way back. We had this strong boost from massive national debt and at the same time we had the lockdowns, the collapse of supply chains. Supply shortages and government demand policies through debt have caused this inflation. That’s over for now.

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Pioneer: So you’re giving the all-clear?

Prof. Sinn: The rates are still quite high. We are at 2.4 percent in the Eurozone and in America we are at 3.4 percent. But you have to see that the Americans calculate the rate differently. If you use the American method for Europe, Europe also comes to 3.4 percent instead of today’s 2.4 percent.

Pioneer: Your forecast: Will the interest rate cut come or not?

Prof. Sinn: Interest rates will be lowered and the falling interest rates will keep inflation simmering. All sorts of countries in Europe secretly don’t think this inflation is that bad. Quite the opposite. Anyone who is in debt benefits from inflation because the real value of their debt falls.

Pioneer: Thank you very much Prof. Sinn.

Note: This is the abridged version of the Pioneer podcast conversation. You’ll hear the first part this morning; the second part, which deals with the future of pensions, next week.