Economist Monika Schnitzer believes in Germany’s capacity for innovation. However, she says that politics must provide clear direction and the will to actively invest in the future, as she explains in conversation with Neue Zürcher Zeitung.

This interview by Jannik Belser and Malte Fischer was originally published in NZZ on 9.10.2025 in German. Translated and edited for layout purposes by the UBS Center.

Professor Schnitzer, how does it feel to be the Chair of the German Council of Economic Experts when your own proposals are ignored by the government?

I would not say that our advice is always ignored. Politicians do listen when we speak with them. However, what we as economists consider right is not always easy to convey politically. It is equally important that we reach the public. When people are aware of the country’s problems, this creates the foundation for political action.

So far, we see little movement. Are politicians lacking insight?

That depends on the issue. Take pensions: some politicians clearly recognize that urgent action is needed in this area. But there are also politicians who believe that we can handle the demographic problems solely through more growth, redistribution, and immigration. That is a fallacy. Added to this is the government’s consideration for certain voter and interest groups – for example, when it promises a “mother’s pension” without necessity.

Or when it pledges support to struggling industries? This Thursday, Chancellor Merz is hosting a summit for the automotive sector.

It is always good when companies and the government talk to each other. However, if politicians believe that despite the rapid pace of technological change everything can remain the same, and that the car industry can continue as before with combustion engines, they are mistaken.

Why? The comparative advantage of the German auto industry still lies in combustion engine technology.

The carmakers have adjusted to the fact that electric cars will exist and have therefore invested in this technology. If the government now delays the phaseout of combustion engines or raises the permissible emission limits, it devalues the manufacturers’ investments in e-mobility. Moreover, it increases uncertainty among consumers, who no longer know in which direction developments are heading and therefore hold back on purchases. In France, car sales – including those of combustion vehicles – declined after the government abolished subsidies for electric cars.

There is also to be a political summit for the steel industry.

Many jobs are currently at stake in the steel sector. With “green steel,” as the government envisions, today’s level of production and employment cannot be maintained. Green steel is simply too expensive. Especially since China is flooding the global market with subsidized steel.

The EU wants to protect its steel producers through import quotas and tariffs.

It will be difficult to abolish such tariffs again. In the long term, the transformation process in the steel industry cannot be stopped; it should instead be politically supported and accompanied. The Federal Employment Agency, for instance, could help workers who lose their jobs to find new employment.

Where should these workers from the steel industry find work?

In the defense sector, there is a need for workers with qualifications similar to those of employees in the steel and automotive industries. The problem, however, is that unions slow down structural change when they focus on generous severance packages and early retirement rather than helping workers move to new jobs in other sectors. In doing so, they also burden the pension system.

Chancellor Friedrich Merz has announced an “autumn of reforms,” which also includes social insurance systems.

The government has set itself ambitious goals. Much of this will take time for political reasons. And not everything has ready-made plans waiting in the drawer. The situation is different with social insurance. Here, there have been good proposals for years on how to get the problems under control. The government must accelerate the reform of social insurance. If it waits until the next elections, it will be too late. So far, much has been going in the wrong direction.

In what way?

The government’s plan to fix the pension level at 48 percent of the average wage is a mistake. It makes the pension system even more expensive. The same goes for the proposed “active pension.” Instead of offering tax incentives to retirees who voluntarily continue working, it would be better to raise the regular retirement age and reduce early retirement options.

The government is considering filling the gaps in social insurance through transfers from the federal budget. Has relaxing the debt brake reduced the pressure for reform?

Without additional borrowing, the government could not have financed investments to repair infrastructure and modernize the armed forces. However, it should have ensured that the money was indeed used for investments and not diverted to finance transfers to social insurance.

Wouldn’t it have been better if the government had cut spending elsewhere to modernize infrastructure?

Whenever the government cut spending in the past, it always started with investments. The backlog in defense and infrastructure far exceeds what could be saved in other spending areas.

How about a bit of “Milei”? The government could, for instance, cut subsidies across the board by a uniform percentage.

A large share of subsidies goes toward transformation. Expanding charging infrastructure, broadband access, chip production, and hydrogen are important measures. I find a blanket rollback of the state, like the Argentine president is pursuing, not very constructive. The state provides essential services such as public order, the judiciary, and administration. You cannot slash these with a chainsaw without sacrificing quality. It would make more sense to simplify and accelerate processes in public administration, for instance through digitalization.

What specific steps would you like to see from the federal government now?

A key issue is the modernization of the state. I welcome the establishment of a digital ministry. But that is not enough: the agency must be operational – with sufficient staff, financial resources, and authority. It cannot be that federal states or other ministries block its work. The digital ministry needs clear political backing that must come from the very top, from the chancellor’s office.

What else is needed?

A clear vision of what the German economy should look like in the future. It is not enough to want to preserve the status quo. Our goal must be to remain competitive in the global marketplace through better technology, higher productivity, and new products.

What exactly do you have in mind?

I am thinking above all of AI applications in industry. Germany has enormous amounts of data that have so far been underutilized. American companies like OpenAI are increasingly opening offices in Germany – not only to sell their products but also to collect data. We should be doing that ourselves. The start-ups exist; we should connect them with large industrial companies. The defense industry could also benefit from such collaborations, for example in developing drone defense systems. New technologies are the economic model of the future. Steel will not save Germany forever.

Is there not a risk that the state will back the wrong technologies in its industrial policy and lose money as a result?

When it comes to basic research and foundational technologies, it makes sense to support a wide range – for example, to fund ten projects even if only one succeeds. The one that makes it should, with the initial boost, become so successful that it justifies the investment in the others. In the case of billion-euro projects, such as building a direct-reduction plant for producing green steel, you cannot afford ten options. The government must pick one and then see it through consistently. Halfheartedness is dangerous.

Does Germany lack entrepreneurial spirit?

I do not see a problem of mentality. Germany has many people who are eager to start businesses. But much depends on structures and opportunities. In Munich, for instance, university graduates have highly attractive employers like BMW, Allianz, or Munich Re right on their doorstep. Many therefore do not immediately think of founding a company themselves. It is different in Berlin: there are fewer established corporations but a vibrant start-up scene.

What would need to change in large companies for them to become more innovative?

Those with a functioning business model are reluctant to question it. The automotive industry is a typical example: combustion engines ran well for a long time, and established firms feared that innovation might endanger their business model. There is also an organizational issue: in many corporations, board members have three-year contracts, which encourages short-term thinking in quarters rather than longer horizons.

What can Germany learn from Switzerland?

From the outside, I have the impression that in Switzerland, politics functions with remarkably little friction. There is less quarreling, and decisions are clearer. The innovative strength of the economy is impressive, even though a few large firms are also very important there, such as in the pharmaceutical industry.

Despite the challenges, do you remain hopeful for Germany?

In the end, whenever everyone feels the crisis, the Germans have always managed to pull through. I think the widespread narrative that everyone has become lazy is exaggerated. Many young people work hard, while, ironically, it is the baby boomers who increasingly retire at 63. Germans will put in the effort – once they understand what they are working for. What is missing at the moment is clarity. Politics must make it clearer why we cannot go on as before. A small wealth tax here or a bit more redistribution there will not solve the structural problems.

Are Germans still doing too well?

Germany today has fewer unemployed people than twenty years ago, which means that overall, fear of job loss is less widespread. But in industries like automotive and steel, employees are worried. They hope that the state will help them – which will only be possible to a limited extent. Unlike in the past, there are now political forces offering very simple solutions. The far right says that all you need to do is take the money away from foreigners and “slackers.” The far left says that the rich simply need to pay more. The government must counter these narratives. So far, the SPD and the CDU have been far too timid.

Do you fear that these simple narratives could prevail? CSU leader Markus Söder has called the current government “the last bullet of democracy.”

I do not think much of such rhetoric. We do not need apocalyptic sentiment but honesty and orientation. The message must be: if we continue as before, we will not preserve prosperity but lose it. We must actively shape our future.