Dusseldorf In spring, the corona pandemic was associated with the deepest economic slump in German post-war history. In the second quarter of 2020, the decline in economic output was more than twice as strong as at the height of the financial crisis.
It was therefore right that the federal government at the time took bold measures to stabilize the economy. Politically, it is far more difficult to quickly scale back such emergency measures than to draw on unlimited resources in an emergency.
However, this is advisable, since these stabilization and containment measures are very expensive for the state and also slow down the growth-stimulating structural change. Moreover, if bailout programs persist for too long, these means of stimulation will not be available when the next crisis is imminent.
This is exactly what happened with Russia’s invasion of Ukraine. Although the German economy grew strongly last year with a plus of 2.9 percent, the order books are well filled and the number of vacancies has reached an all-time high, the socio-political aid programs are still running in Corona crisis mode.
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The direct economic effects of Russia’s attack on Ukraine are probably manageable for western economies. Just under two percent of German exports go to Russia; for the EU as a whole, the share of exports to Russia is around 1.5 percent. But the uncertainty, not least in Germany, as a result of the energy supply being heavily focused on Russia, is great. And uncertainty is poison for the economy and investments.
Inflation could top 6 percent in 2022
The economic consequences of the comprehensive sanctions against Russia are likely to be more serious, and parts of the German economy will feel the pain, especially if these sanctions last longer.
It is also clear that energy prices will remain high for an indefinite period and will continue to rise depending on the course of the war. If the gas price were to rise by another 50 percent, inflation in Germany could exceed the six percent mark this year.
In 2023, the price level would rise by a further five percent, as current simulation calculations by the German Economic Institute (IW) show. As a result of the surge in energy prices alone, economic growth is likely to be 0.6 percentage points lower this year and 1.6 percentage points lower next year.
Even in the unlikely event that the gas price would remain at the high level of the fourth quarter of 2021, this would cost the German economy 0.2 points of economic growth this year and 0.7 next year.
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.
Now that German politicians have decided to phase out coal and nuclear power at the same time and have implicitly relied on cheap Russian gas to bridge the gap that has arisen.
Even the biggest optimists should have realized in the past few days that the energy turnaround, which is the focus of the current government, will be much more difficult and, above all, much more expensive than expected. Without stronger economic growth, this turnaround, which is the right one in the matter, cannot succeed.
In view of the Ukraine crisis, the duration of which is unknown, the federal government would be well advised to resist the temptation to decide on new small-scale economic aid or generous and therefore expensive social benefits. It is important to set priorities.
Those in need must be compensated in a targeted manner
For example, the energy transition that has been initiated must take greater account of the security of supply aspect, without implicitly planning for Russian gas as a cost-effective fallback option that seems to be available in unlimited quantities. It is also important to specifically compensate those in need for the next surge in inflation.
Considerations to cushion the energy price jumps by reducing VAT on such products are not only expensive, they are also going in the wrong direction. If you want decarbonization, you have to make fossil energy noticeably more expensive. Germany’s consumers are currently experiencing in fast motion what the energy transition means for them personally, namely a noticeable loss of purchasing power.
More background on the impending energy crisis:
The government has also decided to invest significantly more money in the Bundeswehr. This will require immediate action, but is ultimately a task for many years. It should therefore be clear that a sustainable increase in the defense budget cannot be financed through debt in the long term.
The only way to compensate for the inevitable loss of prosperity caused by higher energy prices and additional arms spending is to generate additional income through economic growth. This is actually a permanent task of economic policy, but for a variety of reasons it is not always the top priority. For the next few years, however, the top priority of economic policy must be to adjust as many political parameters as possible in such a way that the supply of labor and capital is increased.
There are no quick-acting remedies against the demographically induced decline in the labor force that will soon set in. It is therefore important to try various measures to motivate part-time employees to work full-time. Against this background, the planned expansion of the mini-job limit should be critically reconsidered.
It is also important to create an immigration-friendly climate and increase the incentives for the long-term unemployed to take up regular employment. Furthermore, the incentives for pensioners to continue working should be strengthened, which would be wiser than discussing a further increase in the normal retirement age, which would be possible after 2031 at the earliest.
The decisive variable for the supply of capital is the after-tax return, and Germany has fallen behind when it comes to the taxation of internationally mobile capital.
With a 30 percent tax burden at company level, Germany is a high-tax country in the international arena. A symbolic but important step would be the announcement that corporate tax solos would be scrapped immediately as soon as the new fiscal framework became clear.
Habeck should extend the term of the last three nuclear power plants
In addition, it is necessary to adapt the outdated depreciation rules, which often do not do justice to the economic useful life of modern means of production. Software and IT become obsolete much faster than machines made of steel. In addition, the planned “super write-offs” should not be limited to climate protection and digitization, as otherwise there is a risk of delimitation problems and misallocations.
A step with a very large symbolic effect would also be if the Green Economics and Energy Minister Robert Habeck were to extend the life of the last three nuclear power plants in view of the new geopolitical situation – after the prescribed safety checks. In the current geopolitical crisis, the SPD has shown that politicians are able to quickly vacate positions that were previously considered immovable when the general conditions have changed.
Now the Greens could prove that they, too, are ready to throw dogmas overboard in this geopolitical crisis. Habeck doesn’t have many options to quickly make Germany at least a little more independent of Russian gas.
More: Imminent gas gap: Germany will be dependent on Russia in the coming winter as well