Professor Hans-Werner Sinn is president of the Ifo Institute for Economic Research, director of the centre for economic studies (CES), ceo of CESifo Inc and Professor in the department of economic and public finances of Munich University, Germany

In these times of economic uncertainty, the experience and knowledge of experts such as professor Hans-Werner Sinn is of vital importance. As president of the Ifo Institute for Economic Research, which publishes the Ifo World Economic Survey measuring the economic climate and making quarterly predictions, professor Sinn has firsthand access to the most recent perceptions of the state of the economy.

Could the results of the latest climate indexes be too pessimistic matching the previous period of real estate euphoria?

I find the pessimism justified in light of various other indicators such as the sharp increase in US unemployment way beyond its 2003 peak or the unbelievably sharp decline in German order flows and in the domestic German ifo index.

What have been the outcomes of the G20 meeting that took place in Washington last November?

The G20 meeting helped to save the banking system by defining rescue packages worth 3.3 trillion euros.

How is the crisis affecting the non financial sector?

Big companies are now suffering from a credit crunch, because banks did not hold enough equity capital. They should use their power to force their governments to opt for a better and tougher system of banking regulation.

What type of measures to regulate the financial market should be taken in the subsequent G20 meetings?

However, it has not yet come up with solutions for the long-run stability of the banking system. For that we need harmonized rules that force the banks to operate with more equity capital, because with the tiny bits of equity capital they use today they are lacking a sufficient buffer for bad times and, what is worse, they begin to gamble.

What mechanisms could the governments use so that the bailouts of the financial markets reach also the non-financial sectors?

Governments should not bail out the non-financial sectors, because then we would enter a socialist type planning system. They should rather pump fresh equity into the banks to enable them to provide sufficient credit to the economy.

What are the reasons for the highly volatile stock market witnessed?

Market agents are nervous. As the downturn of the economy has just begun and the US price earnings ratio is still at its long term average there is scope for further dramatic reductions in share prices. On the other hand, the decline has already been sharp, and some believe share prices cannot fall further. I belong to the former group.

What is the playing field of the Governments in order to try to counterbalance this trend and minimize the social damages of the crisis?

We now need Keynesian demand policies. The most important elements of such policies are large scale infrastructure projects and tax cuts. Infrastructure expenditure is aggregate demand and tax cuts create aggregate demand.

Do you think that the public budgets will need to use privatisation and/or other schemes of publicprivate collaboration (e.g. public concessions)?

Any measure that generates infrastructure investment would currently be good, including public-private partnerships.

Do you think Governments should invest more actively in infrastructures as an anti-cyclical measure?

I find it most urgent to abolish administrative constraints to infrastructure projects. In my country the energy sector wants to spend billions, but cannot due to political and administrative hurdles to investment.

How can the Western world manage this context of economic downturn and changing geopolitical balance to the east?

The European and American economies cannot slow down the tendency to convergence, and they should not. Emerging economies must grow faster, for if not they will never catch up. With this I do not mean that we should wait for the others.

What should the European and American economies do?

The west should keep going, and the most urgent measure for that purpose is to overhaul the Anglo-Saxon financial system which is very badly constructed in various dimensions, seducing households to consume too much and save too little. The fact that the US economy has absorbed the largest chunks of world wide capital for decades rather than exporting capital to other countries has been the major obstacle to growth. The Americans have to learn restraint and stop living beyond their means.

What recommendations would you give to the governments in order to improve the environment under the current market conditions?

Local environmental problems can only be dealt with locally, and global issues only globally. Dust, waste, water quality, noise etc. are local issues, but the CO2 output is a global one. It needs a global response through a post-Kyoto agreement in Copenhagen this year. Let us hope that the US will now sign the treaty and that China and India will accept emission constraints. Without that, European measures to reduce the output would be counterproductive, as these measures simply reduce world energy prices and subsidize the sinners.