“It’s just getting really hard now”

According to the President of the Freiburg Walter Eucken Institute, this development is particularly related to the energy crisis. In order to mitigate this, the federal government must also do more so that Germans save more gas. The planned gas surcharge, with which gas importers can pass on higher prices to households, is too low.

Read the whole interview here:

Mr. Feld, the German economy contracted minimally in the second quarter. How much do we have to worry about that?
Germany is in extremely uncertain waters. The economic situation remains tense. However, the numbers are not as bad as many had feared.

The Federal Statistical Office has revised economic growth for the first quarter. Instead of an increase of just 0.2 percent, we are now at 0.8 percent.
With all the bad news of the past week, this is a ray of hope. The economic damage caused by the corona pandemic last winter was not as great as previously feared. That gives some momentum for the current year. Positive growth in gross domestic product could still result over the year as a whole. But we also have to be clear: It’s only now that it’s really getting tough.

How hard?
The economic setbacks in the first half of 2022 were just the beginning. The problems have only really started to build up and are spreading. The energy crisis will hit hard in the second half of the year. Now we might be happy about a quarter with a plus of 0.8 percent. However, there is a high probability that we will experience two more quarters with a clear minus this year. That would be a technical recession.

>> Read here: Ifo index falls to two-year low

How do we compare to the 2008/2009 financial crisis and the 2020 corona crisis?
I have to be honest: the slumps in the numbers may have been more extreme back then. But the situation now may well be more problematic. In the previous crises, there was an external shock to which one could react in a targeted manner. It was then quickly recognizable: At some point it will be over. Now we are in a situation where the shock lasts indefinitely and always brings new consequences, which then reinforce each other.

You have to explain that.
The energy crisis arose from the war in Ukraine. This meets the consequences of the corona pandemic. This drives up prices, especially for gas and oil. Price increases can now be seen across the spectrum of goods and services. The high prices mean that companies are partially shutting down their production and waiting. This in turn increases the order backlog, so that the pandemic-related supply chain problems are exacerbated by the war.

>>Read here: “We are in tatters” – German economy fears recession

At the same time, there is a risk of a permanent stop in the supply of Russian gas.
Then a recession would be inevitable.

How do we have to prepare for this?
With full determination. Many companies still have opportunities to switch from gas to other energy sources. The substitution is now happening gradually, but much more is possible. We must take whatever energy we can get. This includes nuclear power. The three remaining nuclear power plants must continue to operate for at least five years. And we have to get this moving quickly. The time is running out.

How about giving gas consumers an incentive to save by making them feel the high prices?
Price incentives are a crucial tool and need to be used more. So far, the federal government has primarily relied on appeals to the population. That is understandable. However, it is now apparent that this alone is not enough.

With the gas surcharge, which is to apply from October and with which gas importers can pass on higher prices to consumers, the government is now taking action on prices for the first time. A four-person household can incur additional costs of up to 1,000 euros.
It will probably be less. And that’s not enough as an incentive. Further steps are needed to let prices take effect and reduce gas consumption.

>>Read here: This is how expensive the new gas surcharge will be for consumers

What do you think of an end to the tank discount that even artificially lowers prices? Finance Minister Christian Lindner wanted this at all costs, but you, as his chief adviser, could finally advise him against it.
The tank discount will expire after three months. However, many people depend on the car and are therefore not very price-sensitive. It’s different with gas. Companies are switching to other energy sources, private households will consider whether they have to heat every passage room.

How are the citizens supposed to cope with even higher prices?
Of course, relief is needed, especially for low-income households. There is no way around transfers for recipients of basic security, unemployment benefit II and housing benefit.

Lindner also wants to adjust income tax to mitigate the cold progression. The rich would benefit from this as well.
You would benefit too. But this tax reform can definitely be designed in such a way that lower and middle incomes in particular are relatively better off. And that is exactly what I will advise.

How long will the price increases go on like this?
That is hard to say. The forecasts say that the high point could already be reached. But I would be more careful. The following rule of thumb works particularly well in phases of high inflation: one-third of the producer prices are reflected in the consumer prices, i.e. the inflation rate, with a delay. Producer prices are still at a very high level. In the past four months, they have each grown by more than 30 percent. So there is some evidence that even double-digit inflation rates are possible.

More: Inflation in Germany at 7.5 percent in July – this hits one group in particular