Stefan Kooths, head of business cycle and growth research at the Kiel Institute for the World Economy since 2014, views current financial developments across Europe through the lens of monetary policy and fiscal rules. The Kiel Institute produces joint economic forecasts for the German federal government alongside four other leading research institutes. Kooths also teaches as a professor of economics at the BSP Business and Law School in Berlin and Hamburg, and chairs the Friedrich August v. Hayek-Gesellschaft, alongside holding roles with the International Economic Senate and the Mont Pèlerin Society, plus the Academic Advisory Board of the Liberal Institute in Zurich.
Reflecting on the Maastricht Treaty discussions from roughly 35 years ago, Kooths initially held an optimistic view regarding member states adhering to the established rules. The fundamental premise relied on keeping fiscal policy at the national level while granting the European Central Bank strong independence in monetary policy. Kooths notes that any restriction of full national financial responsibility undermines the monetary union. Over time, the original guardrails of the Maastricht criteria and the Stability and Growth Pact underwent adjustments, resulting in fiscal regulations that became excessively complex for the public and political actors alike, alongside a trend toward debt pooling within the European Union.
Regarding the return of market discipline, Kooths considers the higher yields demanded by capital investors on French government bonds compared to German federal bonds to be a positive mechanism for restoring sustainable fiscal policy. Because interest rate increases primarily affect new debt rather than the entirety of existing obligations, politicians retain time to correct their course. The broader rise in government bond yields across numerous nations reflects both a normalisation after an extended period of low interest rates and mounting anxiety over sovereign debt levels. Artificial intelligence expectations and massive investment demands elevate natural equilibrium interest rates, while western government debt levels relative to gross domestic product stand at unprecedented peacetime highs. Within the euro area, the European Central Bank is phasing out its bond-purchase programmes, forcing governments to rely more heavily on private capital.
Kooths remains critical of the European Central Bank's crisis management framework, including the Transmission Protection Instrument, arguing its mere existence provides private investors with a financial safety net during crises. He advocates for the removal of such tools to ensure responsibility and liability remain aligned, leaving national budgetary crisis management outside monetary policy. Commenting on international trade, Kooths observes that globalization has persevered despite US tariff measures, driven by the substantial economic benefits of international division of labor that benefit both export and import activities rather than mercantilist export surpluses.
Addressing the domestic economic situation, Kooths indicates that while capacity utilization improves, Germany faces structural growth weakness rather than a cyclical dilemma, with modest production gains occurring against a backdrop of stagnant capacity. Key contributors to this structural weakness include demographic shifts characterized by an aging population and declining net immigration, alongside high levies that suppress work incentives and heavy regulatory density that stifles productivity growth.
