SCOTT SIMON, HOST:
Germany has been Europe's largest and most stable economy for decades. But last week, the country reported lower than expected growth to the gross domestic product and attributed that mainly to shrinking industrial manufacturing and the war in Ukraine. Marcel Fratzscher is president of the German Institute for Economic Research, and he joins us from Berlin. Thanks so much for being with us.
MARCEL FRATZSCHER: Thank you for having me.
SIMON: What happened? I mean, the German economic model was considered the most successful in Europe.
FRATZSCHER: Well, Germany was hit particularly hard by the pandemic and now by the energy shock coming from the Ukraine war. So Germany was very dependent on Russian energy fossil fuels before the war. That meant energy cost increased a lot. Germany has a very large energy intensive industry. That's one part of the story. The other part of the story is that after a very successful decade of the 2010s, many German companies didn't manage the transformation towards new technologies.
SIMON: What do you believe German companies would need to do to make the economy overall more successful?
FRATZSCHER: German companies need to do two things. They need to reshape or rebalance their model of globalization. They are far too dependent on China - so diversify, be less dependent on China and less dependent on the United States. That's another big threat coming from the Trump administration and the trade conflict that administration is likely to pick with Germany and with Europe.
And second, they need to become more innovative in digital technologies and green technologies. Electric cars is an example where companies have enjoyed the success of the past decade but, to some extent, have been a victim of their own success.
SIMON: What are the political implications because, of course, the coalition government collapsed just a few weeks ago?
FRATZSCHER: Well, in an ideal world, the government would step in and have a major fiscal stimulus - maybe, to some extent, comparable to what the U.S. economy experienced both under the Trump and under the Biden administrations, maybe a little less strong because that will increase government debt tremendously. But the German government has been going the opposite direction. It has a debt break, which basically doesn't allow the government - the federal and the state governments - to run deficits.
So cutting spending and particular public investment in times when it's difficult, like now, is the worst that a government can do. But for that, the government really need to change course and have a major drive on investment and - including also tax cuts for companies and for citizens.
SIMON: What political parties are in a position to benefit?
FRATZSCHER: There are completely unrealistic expectations among citizens what the government and what the state has to deliver. Germany has a very different economic model compared to the U.S. - very big social security system. There is this expectation the government has to take care of its citizens, and that's just not realistic in a situation like this, where companies have to do most of the heavy lifting.
And so the opposition clearly is benefiting in this campaign for the new government - elections taking place at the end of February next year. But the citizens are going to be disappointed because the new government, no matter what coalition government it will be, will not be able to live on those expectations.
SIMON: And does this promote populism and extremism sometimes?
FRATZSCHER: Well, in Germany, we have an increasing social polarization - inequality in savings. And the people losing from globalization and from technological change are often people with lower income, lower skills. This gives a lot of support to right-wing extremist parties. The anti-democratic AfD, Alternative for Germany - that's the translation of the party - has gained in many recent polls and state elections. So populism is on the rise because populists pretend that there are easy solutions when they're not.
SIMON: But in your explanation of events, it sounds as if many working-class Germans have a right to be dissatisfied.
FRATZSCHER: If you look at the facts, we have record employment. We have never had more people in jobs as we have today. Wages have been rising, including for low-income workers. The minimum wage has increased substantially by more than 40% since 2015. But the concerns, the worries about the future - those are completely understandable. Germany has an aging society, so social benefits will have to be reduced in order to stay manageable. There will have to be tax increases for some to also finance government spending. There's climate change. There are geopolitical conflicts in Europe with the Ukraine, what's just outside of the European Union. So my point is looking at the past 15 years, I think Germany has done really well. The war is about the next 15 years, and those concerns are fully justified and understandable.
SIMON: I'm sure I don't have to tell you, Mr. Fratzscher, that the rest of the world gets a little more concerned about any rise of right-wing extremism in Germany than in other places.
FRATZSCHER: Yes, Germany has a history with a very, very dark spot in the 1930s and 1940s. German democracy has many checks and balances. German citizens are ultimately pro-European. And I know one has to be careful saying that, but I do believe that German citizens do remember history and have taken the lessons from that. So I'm actually quite confident that German democracy is strong enough to withstand those conflicts that we currently experience.
SIMON: Marcel Fratzscher is president of the German Institute for Economic Research. Thank you so much for being with us.
FRATZSCHER: My pleasure. Thank you. Transcript provided by NPR, Copyright NPR.
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