After the brief, hapless chancellorship of Ludwig Erhard (1963–1966), who was considered the father of the economic miracle in the post-war period, the first grand coalition in post-war Germany was formed at the end of 1966 under Kurt Georg Kiesinger (CDU). Although this government lasted only three years, it was probably the most successful federal government to date. One of the lasting traces left by this government is the “Act to Promote Stability and Economic Growth” that came into force in June 1967, loosely known as the Stability Act.
This law, coined by the then Economics Minister Karl Schiller, specifies the national goal of “overall economic equilibrium” mentioned in the Basic Law – i.e. the simultaneity of stable prices, a high level of employment, constant and appropriate economic growth and foreign trade balance. This law was shaped by the optimistic zeitgeist of Keynesianism in the 1960s and the idea that the state was able to use “global control” to balance out macroeconomic fluctuations at will.
This change of government and the codification of the new macro-control were the result of economic concerns: for the first time since the currency reform of 1948, the upswing faltered and unemployment rose. Karl Schiller, who was previously an economics professor at the University of Hamburg, relied on the Anglo-Saxon concept of global control, according to which the economy is stimulated with credit-financed spending programs and the debt incurred is reduced in the subsequent upswing.
The world is heading towards a climate catastrophe
In fact, the mini-recession of 1966/67 was quickly overcome. At the same time, this successfully overcome phase of weakness became a rather unfortunate precedent for the different types of recessions that followed in the 1970s and the associated economic policy mistakes under the later Chancellor Helmut Schmidt, which led to “stagflation” and discredited demand management to some extent.
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Nevertheless, this stability law still obliges politicians to comply with the “magic square” of 1967. Today, however, we know that these four goals are not free of conflicts and can only very rarely be realized at the same time. In addition, with the introduction of the euro, this became a target triangle of national economic policy, since the responsibility for monetary stability in the euro zone was transferred to the ECB.
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The economic policy of the incumbent “traffic light” must move in a different field of tension than that with which Schiller was confronted. What is sought today is a course that is as growth-friendly as possible, which at the same time takes into account climate protection, energy security, monetary stability and the aging of the population.
Not only since the most recent world climate report has it been clear that, according to current scientific findings, the world is heading almost unchecked towards a climate catastrophe. After two centuries of carbon-based industrialization, Germany should therefore be decarbonized by 2045, i.e. net CO2 emissions should be reduced to zero.
Until recently, natural gas, which is relatively clean compared to coal and oil, was seen as a fallback option to avoid blackouts when the wind isn’t blowing and the sun isn’t shining.
With Russia’s attack on Ukraine, geopolitical coordinates that were previously considered stable have shifted.
Now the energy security of Germany, the fourth largest economy, is suddenly at stake. Anyone who pulls out of nuclear power and coal-fired power generation at the same time and has to worry that the gas supply is also uncertain, has to worry about energy security and has to rely on the import of nuclear or coal-fired power.
Huge investments are required to manage the energy transition, both private and public. Investments are generally seen as the basis for economic growth. State investments can pave the way for private investments, for example if good infrastructure is provided.
The forthcoming energy investments will undoubtedly reduce Germany’s CO2 emissions, but will not directly increase the economy’s production possibilities. After all, a new, decentralized supply infrastructure only replaces the existing high-performance large power plants.
It’s always about the money
In addition, financial policy is always a question of the use of scarce resources. Additional state investments in billions in the energy transition are missing elsewhere, for example in education, research or armaments. The economic research institutes rightly warn in their spring report: “The substitution of capital stock and the expansion of renewable energies tie up resources that cannot be used for other purposes.
Restrictions in consumption are therefore unavoidable if the economic capital stock is not to be weakened by a lack of replacement investments elsewhere” – or, to put it in the words of Economics Minister Robert Habeck, “contrary to what is claimed in Sunday speeches, the energy transition is not without leave impertinences”. There is no alternative to the energy transition, but it will initially make Germany poorer.
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In addition, apart from the current energy price capers, there is some evidence that the times of very low inflation rates are over. Decarbonization will drive price increases; Estimates assume that inflation will increase by around 0.5 points per year. This reduces purchasing power and causes a loss of prosperity.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
This phase of climate protection-related growth losses hits the German economy at a time when it will be confronted with a massive aging spurt that will last two decades. This is becoming a stress test – not only for our pay-as-you-go welfare state. At the same time, the falling labor supply will depress growth potential and push up wages.
After the 2008/9 recession, German politics was able to draw from a cornucopia for almost a decade thanks to a demographic pause and a very employment-intensive upswing. This “golden decade”, which was not used in terms of growth policy, is over. The incumbent government is now being asked to readjust its political priorities, i.e. to adapt them to the tightening financial framework.
The limited funds for climate protection should be used where they achieve the greatest savings. The aim must be to give CO2 emissions a uniform price that companies and consumers can adapt to. Occasional subsidies and bans, on the other hand, are economically expensive because they harbor the risk of misdirection. Direct aid to compensate for higher energy prices should be focused on those groups of people who are in need – not least because state aid always preserves traditional structures.
In the spirit of Josef Schumpeter, the German economy is facing an epoch of “creative destruction”, a structural change that promotes innovation and creates new perspectives. If the economic policy of the 21st century were less guided by the concept of global control and more by Schumpeter’s ideas, a policy committed to the “new magic square” could become a real success story.
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