Dusseldorf Gasoline and diesel prices are rising rapidly, and the bill for energy imports has doubled within a year. Despite austerity efforts, Germany will probably have to spend 2.9 percent of gross domestic product (GDP) on imports of crude oil, petroleum products and natural gas. In the previous year it was 1.45 percent. The situation sounds current – but we write the turn of the year 1973/74, not 2022/23.
Chancellor Willy Brandt (SPD) actually wanted to relax and bask in his triumphant election victory – and in the fall of 1973 he suddenly found himself facing the greatest economic test since the founding of the Federal Republic. The causes of that time show amazing similarities to today. The attack by Arab states on Israel in the Yom Kippur War had a catastrophic impact on global energy markets.
In response to Western support for Israel, the OPEC oil-exporting countries cut production by 25 percent and imposed a supply boycott on the US and the Netherlands, which was later extended to other Western economies. At that time, crude oil covered 55 percent of Germany’s energy needs.
In 1973, Germany paid an average of 82 Deutschmarks for a tonne of crude oil; in 1974 it was 224 Deutschmarks. The oil price shock hit an economy where inflation was already 5.4 percent in 1972. On the one hand, inflation was imported because the Bundesbank tried to stabilize the tumbling US dollar in the Bretton Woods currency system and was buying up large amounts of dollars, thereby significantly increasing the D-Mark money supply.
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On the other hand, consumer prices rose as a result of the heated economy due to high foreign demand with production capacities being fully utilized. As late as the spring of 1973, the federal government had passed a stability program that was supposed to have a dampening effect on the economy. Then came the oil price shock.
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.
Unlike today, in 1973/74 the federal government did not attempt to dampen the rise in energy prices with the help of “price brakes”. As a result, consumer prices rose by 7.1 percent in 1973 and by a further 6.9 percent in 1974. Rather, the government reacted to the supply shock of 1974 with an economic stimulus package intended to stimulate aggregate demand – a mistake, as we now know.
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The German economy was by no means suffering from a lack of demand, but rather from the rise in energy prices. And so in 1975 the Federal Republic slipped into a recession, in which overall economic output fell by 0.9 percent in real terms. The average number of unemployed in 1973 was 275,000 and two years later it reached the one million mark for the first time since 1955.
With this unsuccessful crisis management, the belief in global control died a quiet death. The conviction waned that economic policy could use Keynesian demand management via fiscal policy to smooth out economic waves and guarantee steady growth. The Advisory Council heralded the turning away from this dogma with its annual report for 1976/77.
From now on high growth should be achieved by means of “supply politics”. What was meant by this was a better investment climate for companies, for example through tax breaks and improved depreciation options.
Since the Federal Republic derived its legitimacy primarily from the economic advancement of broad sections of the population through full employment, the labor market became the central task of economic policy. The problem: In the 1970s, the baby boomer cohorts poured into the labor market.
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In addition, the rise in energy prices accelerated structural change. However, fewer new jobs were created in the growing service sector than were lost as a result of increasing automation in industry. It was a new experience that the number of unemployed fell only slightly during the economic upswing, while rising sharply during the downturn.
In 1973/74, the social partners – in particular the public services, transport and traffic union and the German white-collar workers’ union – contributed to the worsening of the crisis. In 1974, they pushed through wage and salary increases of eleven percent in the public sector, which set in motion a wage-price spiral. The public employers lacked the courage and strength to counter the excessive demands.
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Economic growth only picked up again in the second half of the 1970s. Within a short period of time, the companies had succeeded in adapting their value chains, products and business models to the new framework conditions – growth and energy consumption were more strongly decoupled. The resilience and flexibility shown by companies more than 40 years ago give cause for optimism even in the current crisis.
Germany spends a lot of money on energy imports
In contrast to this first oil price crisis, the second oil price shock from 1979 to 1981 overwhelmed the German economy. As a result of the revolution in Iran, crude oil prices rose to 619 Deutschmarks per tonne in 1981, and an impressive 4.85 percent of GDP had to be spent on energy imports. The German economy slipped into recession again.
The number of unemployed rose to more than two million people for the first time in 1983 – and never came down from this high level. In Germany, which has been reunited since 1990, the number of unemployed even rose to over five million for a short time. As a result, not only the collective bargaining parties, but all those responsible for economic policy had learned from the mistakes of 1973/74. Government spending programs are a wrong response to supply-side shocks.
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Even today, the danger of another shock has by no means been averted. Oil and gas prices have been falling rapidly for weeks. But even before the Ukraine war, Germany was faced with the problem of spending more money on energy imports than in 1973. Last year it was 104 billion euros, or 2.9 percent of GDP. According to estimates by the Institute for the World Economy, the energy bill will increase by 123 billion euros this year and by a further 136 billion euros next year. This does not take into account the imports of solar systems and pre-products for wind power systems. Energy will therefore remain expensive in the long run.
According to estimates by the economic research institutes, the overall economic loss of prosperity due to these price shocks will amount to up to 240 billion euros for the current and coming year. In view of the demographic change and the very low productivity growth for many years, it will probably be difficult to make up for these losses – unlike in the much younger Federal Republic of the 1970s. A real upswing with a rapid recovery like that after the 2008/09 financial crisis is not in sight.
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