Overview publications

Corporate Taxes Reduce Investment: New Evidence from Germany

Sebastian Link, Manuel Menkhoff, Andreas Peichl, Paul Schüle

This policy brief provides novel empirical evidence on the causal effect of increasing corporate taxes on firm investment. The study combines unique data on investment plans and their realizations of firms in the German industrial sector and data on more than 1,400 local tax changes in the specific system of business taxation in Germany. We show that firms reduce their investments if corporate taxes were increased. An increase of corporate tax rates to stabilize fiscal revenues would be especially costly during recessions. We conclude that fiscal policy should therefore avoid higher corporate taxation in times of economic crisis. Moreover, our results have implications for the op-timal design of fiscal federalism in Germany. Strong dependencies of municipalities on local business tax revenues should be avoided, as they can be very harmful during recessions.

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How Dependent Is Germany on Raw Material Imports? An Analysis of Inputs to Produce Key Technologies

Lisandra Flach, Isabella Gourevich, Leif Grandum, Lisa Scheckenhofer, Feodora Teti

The Ukraine war and geopolitical tensions pose major challenges for supply chains. Whereas shortages of microchips became a symbol of supply chain disruptions during Covid-19, a survey from June 2022 from the ifo Institute shows that over 74% of German manufacturing firms report production disruptions due to shortages of different types of inputs and raw materials. The production of key technologies that are necessary, for instance for the energy transition, often depends on imported raw materials. Therefore, it is important to evaluate Germany’s raw material dependencies at the product level to identify the risk of future supply chain disruptions. This paper identifies nine critical raw materials, which have a high degree of supplier concentration and are used in more than half of the key technologies. For these raw materials, we provide a detailed analysis on Germany’s dependency on imports.

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Reforming Economic Governance in the Eurozone: Shifting Spending Instead of Expanding Debt Margins

Clemens Fuest

In February 2020, the European Commission announced that it would present a plan for reforming the economic governance of the Eurozone, including the rules for public debt. The project was postponed by the outbreak of the corona pandemic, but now the reform is to come. There is a widespread demand to expand debt leeway, for example for climate protection spending. In view of the already very high national debt and rising inflation, this is the wrong way to go. Fiscal policy coordination should focus more on expenditure reallocations and thus on improving the quality, not the quantity of public spending. What is needed is a modified handling of the existing rules, not a change in the rules themselves.

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The European Added Value of the Recovery and Resilience Facility

An Assessment of the Austrian, Belgian and German Plans

Francesco Corti, Daniel Gros, Tomas Ruiz, Alessandro Liscai, Tamas Kiss-Galfalvi, David Gstrein, Elena Herold, Mathias Dolls, Clemens Fuest

This paper conducts an in-depth analysis of the National Recovery and Resilience Plans (NRRPs) of Austria, Belgium, and Germany. Exploiting a detailed database that covers all the investments and reforms included in the NRRPs and building on insights from semi-structured expert interviews, we study their alignment with EU objectives, the additionality of the spending, and the cross-border effects. We find that all three NRRPs are well aligned with the objectives defined in the RRF Regulation but differ greatly in terms of additionality. Cross-border projects are only of limited importance. We finally highlight some missed opportunities for other cross-border projects.

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German-Chinese Trade Relations: How Dependent is the German Economy on China?

Andreas Baur and Lisandra Flach

In recent decades, China has risen to become Germany’s most important trading partner for international trade in goods. Has Germany become too dependent from trade with China? An analysis using direct and indirect value-added linkages along the supply chain shows that China plays an important, but by no means dominant role for Germany as a supplier or destination market. However, in a survey conducted by the ifo Institute, 46% of German firms in the manufacturing sector state that they currently depend on important intermediate inputs from China. Of those, almost half of the firms are planning to reduce imports from China in the future. The most frequently mentioned reasons for reducing imports from China are the desire to decrease dependencies and increase diversification, increased freight costs and disruptions in transportation, as well as political uncertainty. An analysis at the product level shows that the German economy depends on several critical industrial goods and raw materials from China.

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Moving From Broad to Targeted Pandemic Fiscal Support

Heinemann, Friedrich

This paper conceptualizes an appropriate path for fiscal policy starting from the early phase of the pandemic up to the final transition to a post-pandemic new normal. Using this yardstick, it assesses the initial fiscal response of Member States. It exploits fiscal projections and program data to analyze the adjustment to the economic recovery. For loan guarantee and short-time work schemes, it identifies program-specific parameters that improve target precision and identifies examples of more and less convincing program designs.

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Cutting through the Value Chain: The Long-Run Effects of Decoupling the East from the West

Felbermayr, Gabriel J. / Mahlkow, Hendrik / Sandkamp, Alexander

This Policy Brief analyses the long-run effects of an economic decoupling between the political West (i.e. the EU, the US and their allies) and the East (first and foremost Russia and China). A decoupling of Russia from the US and its allies would have much more severe long-term impacts for real income in Russia (minus 9.7 percent) than in the US and its allies (minus 0.2 percent). The reason for the uneven distribution of costs lies primarily in Russia’s low economic importance compared with the US and its allies.

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What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia

Bachmann, Rüdiger / Baqaee, David / Bayer, Christian / Kuhn, Moritz / Löschel, Andreas / Moll, Benjamin / Peichl, Andreas / Pittel, Karen / Schularick, Moritz

This article discusses the economic effects of a potential cut-off of the German economy from Russian energy imports. We show that the effects are likely to be substantial but manageable. In the short run, a stop of Russian energy imports would lead to a GDP decline in range between 0.5% and 3% (cf. the GDP decline in 2020 during the pandemic was 4.5%).

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Planned Fiscal Consolidation and Under-Estimated Multipliers: Revisiting the Evidence and Relevance for the Euro Area

Daniel Gros, Alessandro Liscai and Farzaneh Shamsfakhr

The Great Financial Crisis caused a deep recession and led to very large public deficits. When financial market tensions erupted, many European countries were forced to reduce their deficits. This ‘austerity’ is often credited with the disappointingly slow recovery during the years after the financial crisis. One reason for such a slow recovery could have been that the impact of a reduction in the fiscal deficits is larger than anticipated during a recession, especially if it is accompanied by financial market tensions. At the height of the financial crisis and in its immediate aftermath, this might not have been properly taken into account.

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Effects of Policy Mix on European Regional Convergence

Ignacio Sacristán López-Bravo (Universidad Carlos III de Madrid), Carlos San Juan Mesonada (EconPol Europe, Universidad Carlos III de Madrid)

This paper analyses the impact of the fiscal-monetary policy mix on the convergence on per capita income of the least developed regions (Objective 1) of the European Union (EU 28) during the implementation of the three European Structural and Investment Funds (ESIF) programmes between 2000 and 2020. The Solow-Swan growth model with control variables allows us to assess the absorption capacity of regions in the different phases of the economic cycle. The empirical results show the effectiveness of EU Regional and Cohesion Policy. However, the combination of fiscal and monetary policy shows an impact that is asymmetric, depending on the region. Thus, a policy mix of fiscal restraint and monetary expansion would boost growth in all regions, but would slow down the convergence process in Objective 1 regions.

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