Photographer: Krisztian Bocsi/Bloomberg

ECB’s German Problem Owes a Lot to This Munich-Based Think Tank

Updated on
  • Ifo Institute has had strong impact on public economic debate
  • Critics argue that it has also helped stoke euroskepticism

For a closer look at why Germans are so exasperated with the European Central Bank, it’s worth visiting a small think tank in a sleepy corner of Munich.

The Ifo Institute for Economic Research gained renown as the sharpest intellectual thorn in the side of the ECB during the region’s financial crisis, as then-President Hans-Werner Sinn declared that hundreds of billions of taxpayers’ euros were being used to shore up a shaky currency bloc. While Sinn stepped down 16 months ago, Ifo’s work continues to color public opinion under his successor Clemens Fuest.

Ifo President Clemens Fuest

Ifo Institute

“Explaining such a very complex issue and its economic significance to the people is a great achievement,” Fuest said in an interview at the institute’s offices in a leafy street across the river from the city’s English Gardens. “Critical discussions must be possible.”

Founded in 1949 with the help of Ludwig Erhard, who would become Germany’s second chancellor in the 1960s, Ifo quickly turned into one of the country’s leading research organizations with a role advising the Economy Ministry on the economic outlook. Its monthly index of the business climate in Europe’s biggest economy has long been a fixture in financial markets.

But Ifo shot to public prominence of a more political form in 2011, when Sinn denounced what he saw as the backdoor financing of the euro area’s stressed economies. His work showed how the ECB’s emergency liquidity creates imbalances in its Target2 financial-settlement system at a potential cost to core countries. It was picked up by German media and resonated with a public already suspicious that they were paying for other countries’ profligacy.

While the ECB countered that Target2 is little more than a bookkeeping system, with a risk only if the euro zone splits up and peripheral nations don’t meet their liabilities, Sinn had made his mark. He went on to use his profile to attack the ECB for many of its policies, saying it has overstepped its mandate and assumed quasi-dictatorial powers.

That rhetoric is often heard among Germans and in the local media, and has been a factor in the public debate as the nation heads for elections next month. Target2 balances are on the rise again as a consequence of the ECB’s quantitative-easing program, and have been cited by the Alternative fuer Deutschland party in its calls for the nation to leave the single currency. For Sinn’s peers, that’s a problem.

“Sinn has given a respectable voice to many of the concerns that Germans have about the euro, but by doing that he has gone beyond what is academically prudent,” said Holger Schmieding, who used to work at the Kiel Institute and is now chief economist at Berenberg bank. “German concerns about the euro have not been corroborated by facts and there is a risk that by exaggerating them you end up crying wolf too often, and that can weigh on your reputation.”

In response to a request for comment, Sinn said in an email that his book “The Euro Trap: On Bursting Bubbles, Budgets and Beliefs” was called one of the most important pieces on the euro in the last decade by Harvard economist Kenneth Rogoff.

New Face

Fuest, a former student of Sinn’s, came to Ifo after heading the ZEW Center for Economic Research in Mannheim. He has also just been elected as president of the International Institute of Public Finance, a group of public-finance economists.

“Of course I’m not obliged to continue the ideas of Hans-Werner Sinn or anyone else,” the 49-year-old said. “On a lot of topics we agree, though perhaps not on all -- but that shouldn’t be the goal. What’s decisive is that one is able to represent what one thinks.”

Fuest has been vocal on debates surrounding Germany’s domestic economic policy, including topics such as higher education -- he says it shouldn’t be free -- and the wealth tax being debated in Germany that he says would lead to capital flight.

He’s willing to weigh in on fast-moving topics such as the surging euro, which breached $1.20 on Tuesday for the first time since January 2015 and which Fuest said could be a problem for exporters if it stays above that level.

He also says the institute shouldn’t shy away from controversial topics surrounding the currency union.

“If you pretend the problems don’t exist then you’re not trying to build trust, but rather you leave the field to those who are actually radical opponents, such as the AfD,” he said.

Expert Witness

Fuest’s expertise was called upon in a German court case questioning the legality of the ECB’s 2012 emergency bond-purchase program, and he called it “a pity” when the challenge was defeated.

Yet he has been relatively restrained on the ECB’s current stimulus program, saying this month that early 2018 would be a reasonable time to start tapering QE, and that there’s no need to raise rates immediately.

The strength of his new platform is largely down to Sinn, who overhauled Ifo after he took over in 1999. At the time, the organization had lost part of its funding and was lambasted by the body responsible for assessing research institutes for its “unsatisfying” contributions to the economic debate. 

“One can talk about Sinn however one likes -- public opinion about him is certainly not uncontentious, so that criticism has also affected the institute,” said Joachim Ragnitz, co-director of Ifo’s Dresden branch, set up in 1993 to study economic issues specific to former East Germany. “But in the end he did help turn things around.”

Now it’s Fuest’s turn to leverage that influence.

“Ifo is not a political institution: it is not our job to defend the euro or to attack the euro,” he said. “We as individuals may have our views, but it is our task to inform the public about what’s going on and what economic research has to say.”

— With assistance by Piotr Skolimowski

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