The term turning point is becoming the code word of our epoch because it marks a historical upheaval. Previously dominant conditions are losing their formative power, and new structures are taking their place.
This also applies to the macroeconomic policy areas: European monetary policy, national financial policy and the autonomous wage policy of the collective bargaining parties.
Russia’s war of aggression against Ukraine is proving to be a massive economic supply shock. It exacerbates the supply chain problems caused by the corona pandemic and creates a great deal of uncertainty that makes it difficult for companies to plan.
The macroeconomic problems are hampering corporate production and lowering the purchasing power of private households.
In addition, there are the challenges of structural change, which have existed for a long time regardless of the pandemic and the Ukraine conflict. It is primarily about the decarbonization of production, consumption and energy generation. It’s about getting out of the fossil age, truly a task of the century.
Likewise, the digital transformation is asking companies to review their business models. This conversion is central to the path to climate neutrality and affects almost all economic and lifestyles.
Demographic aging in almost all OECD countries will also have a lasting impact on growth prospects. From all this it follows that the conditions and options of economic policy are changing fundamentally and traditional orientations are losing their meaning.
European monetary policy is currently being challenged by imported inflation for energy sources and imported advance payments – i.e. by a surge in inflation that primarily has no monetary or domestic economic causes.
Countering this with monetary policy alone is doomed to fail. The often used comparison with the policy of the Deutsche Bundesbank in the second half of the 1970s fails to recognize the differences between the Federal Republic and the European Monetary Union established in 1999.
Central bank policy, which was geared purely to the development of the money supply, has failed worldwide. Michael Hüther and Bert Rürup
At the same time, in a common currency area, the risk of this currency community drifting apart, if not even breaking up, must be taken into account. In addition, even before the first oil price crisis (1974), the Bundesbank had to contend with long-term wage pressure, while the ECB has not yet been challenged by a wage-price spiral.
The central bank policy, which was oriented towards the pure money supply development, has failed worldwide; and the direct control of inflation has failed, as has the communicative control of market expectations (forward guidance). In view of the dominant inflation import, the question of the appropriate orientation for monetary policy therefore arises.
The markets fear a fragmentation of the euro zone
The ECB has never had to fight inflation seriously in its inception 23 years ago. In addition, the latest trend in risk premiums for southern European government bonds shows that the markets are worried about the possible fragmentation of the euro zone.
Despite improved structural data for the southern European countries and despite institutional innovations in the euro zone (including ESM, Resolution Funds, Next Generation EU), memories of the sovereign debt crisis were awakened. All of this highlights the conceptual challenge of monetary policy.
The solution lies in a coordinated combination of interest rate steps and communication. On the one hand, it must avoid damage to its reputation, which threatens if inflation expectations are unanchored, and on the other hand, it must prevent the euro zone from being overburdened as a whole and thus from drifting apart economically.
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Ultimately, monetary policy can only be successful on the inflation front if wage policy and fiscal policy provide relief. But even in this case, given the global political situation, the risk of further exogenous price shocks remains, against which the policy of the ECB is just as powerless as national fiscal and income policy.
Nevertheless, fiscal policy and wage policy, especially in Germany, have a responsibility for stabilization. With a view to employment and its responsibility for stabilizing the economic situation, wage policy is based on trend productivity and the inflation norm of the ECB.
This approach stems from a time when underemployment was high and labor market participation comparatively low. This has changed fundamentally, and many sectors are now characterized by a shortage of skilled workers.
As a result, the increase in gross wages and salaries paid has been significantly higher than that of collective wages since 2012. Scarcity premiums provide additional momentum here.
The proliferation of special funds weakens the transparency of budget planning
Fiscal policy is still under the influence of the “golden decade” after the global financial and economic crisis. From 2012, surpluses were generated in the national budget, so that the debt ratio of over 80 percent in relation to overall economic output after this most severe post-war recession to date could be reduced to below 60 percent before the pandemic.
In addition to the lower interest burden, the dynamics of tax and contribution income as a result of booming employment was decisive. The rules of the debt brake, which have been part of the Basic Law since 2009, were at best supportive.
The possible new debt of 0.35 percent of GDP in 2009 corresponded to the experience with the public investments made. In recent years, it has become increasingly clear that this leeway is not enough, because a large number of special funds have been set up with and without their own debt authority.
The proliferation of special funds contradicts the general coverage principle of the public budget and weakens the transparency of the program function of the budget. Michael Hüther and Bert Rürup
More than 100 billion euros were already parked in it at the end of 2020 and withdrawn from the normal budgetary process. This corresponds to about a third of the federal government’s planned expenditure per year. This proliferation contradicts the general coverage principle of the public budget and weakens the transparency of the program function of the budget.
Germany is now facing considerable challenges in terms of structural change, which can essentially be overcome through private investment, but still require advance infrastructure policy investments. This cannot be answered by referring to rules that are based on experience from 15 years ago, unless one would massively intervene in the structure of expenditure.
Fiscal policy needs more flexibility in order not only to modernize the infrastructure quickly and comprehensively, but also to be able to support private households and companies that have gotten into economic difficulties through no fault of their own.
All of this shows that the turning point poses a real challenge for macropolitics.
Proven experiences have been devalued. All three policy areas must be reconsidered and re-coordinated. The debate on this has only just begun.
The authors: Michael Hüther is director of the Institute of German Economics in Cologne. Bert Rürup is Chief Economist at Handelsblatt and President of the Handelsblatt Research Institute.
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