The western community of states responded to Russia’s attack on Ukraine with tough economic sanctions, after which the aggressor drastically reduced its energy supplies. Expensive energy drove inflation in many European countries to levels not seen in decades and put a number of national economies on course for recession.
The federal government responded with energy saving appeals and lavish credit-financed aid programs. Parallels to the oil price crises of the 1970s are obvious. As at that time, the national debt rose rapidly without changing the basic problem, the rising energy prices.
In the fall of 1976, it was the Council of Economic Experts, headed by Olaf Sievert, who attempted to turn around from the demand-oriented approach with their annual report “Time to Invest”. to usher in global control towards supply-side politics.
According to the Council, improved framework conditions can help if they provide more incentives to track down promising innovations. “More investment would benefit everyone,” the council wrote. The fear that these benefits could be unequally distributed should not prevent people from seizing opportunities. According to the report, these should challenge “new paths of distribution policy”.
Top jobs of the day
Find the best jobs now and
be notified by email.
The growth policy should therefore help to create production opportunities in the economy. These in turn are the basis for good income opportunities and working conditions as well as the opportunity for professional advancement.
How growth policy has changed
It took another six years for these impulses to find their way into Realpolitik. With the “concept for a policy to overcome weak growth and to combat unemployment”, the so-called Lambsdorff paper, this paradigm shift became a political program: the change from Keynesian demand management to improving supply conditions. Keynesians see aggregate demand as the determinant of production and employment.
At the end of 1982, the SPD/FDP coalition broke up and the era of Helmut Kohl began – who admittedly showed little interest in economic issues. After some initial errors, Chancellor Gerhard Schröder was the first to embark on such a growth policy with “Agenda 2010”.
But this epoch soon ended. The deep recession that followed the financial crisis of 2008/2009 was quickly overcome with the help of clever economic stimulus programs, but growth policies did not take place in the subsequent 2010s.
However, the German economy benefited from a demographic pause that has since expired, the euro and a strong influx of workers from other EU countries. The two grand coalitions basked in the associated economic successes from 2013 to 2021 and were able to distribute growth gains in the form of client-specific election gifts.
Blinded by decent growth rates, politicians suppressed clear signals that the German economy was slowly losing competitiveness. The aging of the transport infrastructure and a lag in digitization became increasingly clear.
>> Read here: This is how singles and families benefit in the new year
In addition, Germany became a high-tax country for companies, and taxing income was often inimical to performance. While the upper middle class was already burdened with the top tax rate plus all those who tried to earn their own regular income alongside state aid were plagued by transfer withdrawal rates on the lower income scale, i.e. a deducted percentage, sometimes more than 80 percent. It is therefore not surprising that other economies digested the corona shock faster than Germany at the beginning of this decade.
Last year’s energy price crisis caused by the Ukraine war prompted the government to cushion the consequences of this shock with immense debt-financed state aid. In the multitude of well-intentioned measures, however, the overview was quickly lost. Significantly, a third package was agreed before all the measures in the second could take effect.
No targeted social policy, but large-scale state aid
In order not to be misunderstood: it is the task of the state to ensure that nobody has to starve, freeze or fear for the economic future as a result of the increased prices.
The federal government reacted to the energy crisis with energy saving appeals and lavish credit-financed aid programs.
(Photo: dpa)
However, fuel discounts, cheap local transport tickets for everyone and gas and electricity price brakes are not targeted social policy, but large-scale state aid. Such broadly spread measures have the political advantage of providing few arguments for distribution disputes and thus make a contribution to maintaining social peace. However, they are very expensive and important things have to be put aside – such as getting the economy back on track for growth.
The German economy is facing immense challenges, because it not only has to adapt to permanently higher energy costs, but also to a demographically caused shortage of staff with rising wages.
>> Read here: Seven graphics debunk the myth of the ruined state
At the same time, the decarbonization of industrial production must be promoted, which requires high investments. However, the necessary capital usually flows to where the highest after-tax return can be expected – and these are increasingly locations abroad – not least because the USA is trying to attract foreign investment capital with protectionist measures.
time to invest
In this respect, Federal Minister of Finance Christian Lindner (FDP) is absolutely right with the intention of his “growth package 2023/2024”, which became known shortly before the turn of the year. Whether energy, infrastructure, skilled workers or digitization – the Federal Republic has fallen behind in all these areas.
Definition: What is a recession?
“After a decade of distribution policy and the strengthening of demand, we must risk a regulatory trend reversal to supply policy,” quoted the “FAZ” from the paper of his house. “We had many trained specialists and produced with relatively low energy costs.”
As a result, local disadvantages such as high taxes and levies, complex bureaucracy and a slow pace of modernization in the country could be afforded to some extent.
“But now the high inflation rates, deficits in modernization, the lack of skilled workers and uncertainties in the energy supply are driving up the costs of doing business in our country,” it continues.
In doing so, Lindner also reveals the failings of the coalition: The traffic light lacks a strategy for permanently replacing nuclear and coal-fired power as well as Russian pipeline gas. Liquid gas is expensive on the world market and the expansion of renewable energies is progressing slowly.
It is therefore uncertain whether Germany will ever be able to return to its previous growth path. Without additional growth, however, it will not be possible to finance the major tasks of aging, decarbonization and digitization – unless the population is willing to forego consumption.
The recipes for more growth today are almost the same as they were half a century ago: good schools and universities, flexible working hours, less bureaucracy, modern, efficient infrastructure, favorable depreciation rules and, last but not least, competitive taxes. In contrast to 50 years ago, it is also necessary to react to a falling labor supply and to adapt the education system to the digital age.
>> Read here: How Germany can invest 600 billion euros without taking on debt
It shouldn’t take four years from recognizing such supply problems to realizing answers, as it did in the first red-green federal government. Now is the “time to invest”!
More: More money for investments – economy demands reform of the debt brake