'Germany needs to invest more'

DW: Mr. Fratzscher, are we overestimating the strength of the German economy?

Marcel Fratzscher: In a lot of ways, Germans continue to feel euphoric about the country's economic performance. But we're slowly beginning to realize that everything that glitters isn't gold. In the past weeks and months, there's been a lot of bad news about the German economy. In the second quarter, we saw negative growth. We don't appear to be faring much better in the third. We need to fundamentally rethink our approach in order to realize that economically, we're not as strong as we appear to be.

DW: What are the main issues?

We're facing problems in a number of areas. We have a growth problem: Growth development in Germany has got markedly worse - primarily because Europe isn't doing well. We can't keep up robust long-term growth, if the rest of Europe is stagnating or, worse, is in a recession. We continue to have a major investment problem here in Germany. We don't invest enough. We see it in the public sector, with our roads, bridges and even our schools. And we also see it in the private sector, where investors pump more and more money into foreign countries, but less and less into our own. That's bound to hurt our national economy.

DW: What can the Germans, especially the lawmakers, do to counteract this development?

There's a whole lot that the lawmakers can do, and they're in a great position to chart the course. Germany enjoys a slight budget surplus, so there are a number of things the government could do to spur public sector growth. It could improve the country's transportation infrastructure, it could get the digital infrastructure back on the right track, it could invest more in education. As for the private sector, we need to create the right framework. Companies need to feel that Germany is a good country to invest in again. We have an efficient infrastructure, and we have all the right incentives to invest here. Our government is in a position to set the right course, both for the public and the private sector. So, in a sense, we're in a very privileged position.

DW: Still, Germany's image is much better than the reality you're describing here.

We like to compare ourselves to our neighbors. That's perfectly normal. Compared to our neighbors, we're doing great here in Germany. But we should strive for more than that. What we need to ask ourselves is: Are we making the most of our abilities? Are we developing in the best way possible? And the answer to that has to be ‘no‘. At the moment, we're not prioritizing the right things. Instead, we're focusing on public consumption and redistribution. We're forgetting that we have to invest in our future, today. To make sure that future generations have access to good jobs, good income, and a strong sense of security.

DW: Do we need Europe? Do we need the euro?

We need both Europe and the euro. The common currency is an integral part of Europe. Sure, mistakes were made when the euro was first introduced. There were teething troubles. But that doesn't mean that we should just dial the whole thing back. No, we have to press forward and ask ourselves: What we can do to make up for the lack of reforms, and what can we do to make sure that Europe is successful in the long-run? We need to focus on the future, not the past.

DW: Do you share the view that Germany's future doesn't look as rosy anymore?

Yes, I do. Germany's economic outlook is far less promising than was the case a couple of years ago. We're witnessing a considerable economic slowdown at the moment. And I'm not too optimistic about the coming years either. Looking at Germany and Europe, what I worry about the most is that we're going to stagnate within the next couple of years. There's not enough growth to really create new jobs. There's not enough growth to ensure good incomes. So, while it's not exactly a step in the wrong direction, it's definitely not a step in the right direction, either. We could enter a phase, where it becomes increasingly difficult to pass the reforms we need. This is not just a risk, in my opinion it's the most likely scenario for Germany's future.

DW: The European Central Bank (ECB) has come under quite a lot of fire, especially from Germany. What's your take on the ECB's bond buying policy? Is it the right thing to do?

I think the ECB's expansive monetary policy is the right way to go. Not just for Europe, but also for Germany. The economies are weak - that includes Germany's, too. Keeping interest rates low, providing more liquidity for the banks, so companies have access to cheap credit - that's one of the ECB's key functions. At the moment, it can't meet its primary objective of maintaining price stability. So it has no choice but to act. It has to make use of all the tools in the toolbox. So, despite the risks, I still think this is the right policy.

DW: What would those risks be?

One of the risks of the ECB's monetary policy is that some European banks are being kept afloat, when they should be liquidated. I also see the risk of another financial bubble. I worry that the value of banking assets do not correspond with fundamental financial data, so I expect there will be more turmoil on the markets in the future. I see a risk of intensifying capital outflows from the euro area. You have to weigh all these risks against the benefits of the ECB's policy - that is, keeping credit flowing to companies to spur more growth and job creation. Those risks and opportunities need to be weighed against one another. The way I see it, the pros definitely outweigh the cons.

Marcel Fratzscher is a macroeconomist and professor at Berlin's Humbold University. From 2008 to 2013, he was the head of International Policy Analysis at the European Central Bank in Frankfurt. He is currently president of The German Institute for Economic Research (DIW) in Berlin.