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Finance Minister Christian Lindner (left), Chancellor Olaf Scholz: Creativity is needed - or more honesty with the debt brake
Photo: Kay Nietfeld / picture alliance / dpa
Federal Chancellor Olaf Scholz has launched a concerted action by politicians, employers and trade unions to limit the economic damage caused by inflation.
The initiative is important.
But it will fail if the federal government does not first settle its internal conflict.
This also includes the contradiction, which has not yet been resolved by Federal Finance Minister Christian Lindner, of wanting to strengthen supply-side policy under the condition of fiscal neutrality.
The costs of inflation arise primarily from a so-called negative terms-of-trade shock: the rise in energy prices permanently reduces economic prosperity in Germany, since we are a large net importer of energy.
Companies that are very dependent on energy prices and have little scope for financing invest less and could lose competitiveness in the long term.
Citizens, especially those who have little income and cannot fall back on their savings, are reducing their consumption.
As a result, sales in retail, hospitality, the travel industry and elsewhere in the economy are falling.
The concerted action is intended to create a balance between companies and employees.
Employers want to keep wage increases as low as possible, but the unions are demanding that companies absorb a large part of the shock and that wages rise properly.
Significant restrictions on wage increases are not a sustainable option
Above all, a wage-price spiral is to be prevented, in which wage and price increases mutually boost each other and lead to permanently excessive inflation.
There is no basis for this concern at this time, however, as wages are expected to rise between 4% and 5% this year and inflation is expected to be 7% or more.
As a result, employees will lose at least 2.5 percent of their purchasing power on average.
And that despite the fact that growth in labor productivity and economic output will be quite respectable this year as well.
Given that wage developments are already too low for many people, further significant restrictions on wage increases are not a sustainable option.
However, the more important distribution perspective lies elsewhere: in the inequality of the effects of the shock – on the one hand between companies and on the other hand between consumers.
Because the more companies and the more people have to cut back as a result of the shock, the more investment and consumption will shrink and the greater the damage.
In other words, the greater the inequality among companies and people, and the harder it hits the most vulnerable, the greater the overall economic damage.
In particular, the highly anti-social inflation is causing enormous damage, with low-income people experiencing inflation four or five times higher than high-income people.
Two options for those responsible
Politicians have two options for addressing this inequality and the associated damage to the economy as a whole:
The first option
is a redistribution between companies: from those that are gaining from the pandemic or are able to cope well with the shock (this includes mineral oil and energy companies, some large DAX companies, housing groups such as Vonovia or digital groups), to companies that are particularly affected.
And equally, the state could redistribute from high-income people to poorer households.
This option would require tax increases for winners of the crisis, or at least for high-performing companies and citizens, to support those hit hardest.
For companies, this could include an excess profit tax for mineral oil companies, for income a solidarity surcharge proposed by Friedrich Merz or higher taxation of large assets.
While this would in principle be compatible with Lindner's principle of fiscal neutrality, it would contradict his promise to categorically rule out any tax increases.
The Federal Minister of Finance is also right that in bad times it is usually not a good idea to raise taxes and thus risk a further weakening of the economy.
The second option
is for the state to compensate the most affected companies and people, which would require expansionary fiscal policies and higher national debt.
Help for companies with the technological transformation for climate protection, the expansion of renewable energies, the acceleration of the traffic turnaround and more money for education and innovation are all important investments that are extremely profitable in the long term.
This is the better of the options if it strengthens Germany's economic performance in the long term and helps ensure competitiveness.
Although it increases national debt in the short term, this can be reduced more quickly in the long term through stronger economic performance.
The option is consistent with Lindner's strengthening of the supply side, but contradicts his promise of fiscal neutrality and compliance with the debt brake.
The concerted action must not only produce warm words, but it must address the inequality of the effects of this crisis, both on companies and citizens.
No matter which way you look at it, the German finance minister cannot deliver on his contradictory promises of fiscal neutrality combined with stronger supply-side policies.
He'll either have to swallow one toad or the other.
The better way is an expansive financial policy geared towards investments and social equality, which on the one hand makes significant wage increases possible, but also gives companies enough momentum and incentives to make important future investments.
That would require creativity or more honesty with regard to the debt brake.
But it is the only way Germany can successfully overcome this crisis economically and socially.