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Longest tenure in history: economist
Peter Bofinger
was economic advisor and advisor to the federal government for almost 15 years
Photo: IPON / IMAGO
The economist
Peter Bofinger
(68) was one of the most influential advisors to the federal government for a long time.
For almost 15 years he was a member of the Advisory Council for the assessment of overall economic development - longer than he has been an economist.
He officially retired two years ago, but kept his professorship for economics at the University of Würzburg.
Bofinger is still one of the most renowned monetary policy experts in Germany.
He now only intervenes sporadically in current debates - and takes a refreshing look at the interest rate dispute from the outside.
manager magazin: Mr. Bofinger, there is a heated debate among economists about inflation at the moment. Some of Germany's best-known economists don't even agree on the causes. Why actually?
Peter Bofinger:
I don't even know if the disagreement is really that big.
Most economists agree that inflation is largely due to energy prices.
The issue is: Does the ECB also have a share in the development of inflation?
A few economists believe their monetary policy was too expansionary even before the war in Ukraine.
However, that is not the majority opinion.
Why not?
Before energy prices rose so sharply, there was hardly a reputable institution that warned of high inflation.
In November 2021, for example, the German Council of Economic Experts, to which the prominent money economist Volker Wieland belonged, forecast an inflation rate of 2.1 percent for this year.
The people who strongly criticize the ECB (
including Volker Wieland, editor's note
) have been drawing inflation risks on the wall for years.
That never happened before energy prices went up.
So have some of your colleagues maneuvered themselves into a dead end?
Sure, in the end everyone tries to justify their argument.
For me it is much more important that we have not had any excessive demand in the euro area until recently.
If the inflation were ECB driven, you should have seen an increase in demand.
However, price-adjusted private consumption is still below the pre-pandemic level.
The central bank is now using a traditional tool: it is raising interest rates, and quite quickly. What's the point if inflation isn't demand-driven at all?
The discussion about interest rate policy often goes in the wrong direction, as it is based on nominal interest rates.
However, it is not the nominal interest rates that are economically decisive, but the real interest rates – i.e. nominal interest rates minus the inflation rate.
Unfortunately, the ECB does not make this key difference clear in its communications.
"In terms of real interest rates, we don't have a restrictive monetary policy, but a neutral one."
Peter Bofinger
What do you mean?
Simple example: If you get 1 percent interest on your savings account and the inflation rate is 0 percent, that is significantly better than if you get 3 percent interest on your savings account and the inflation rate is 5 percent.
In the end, the difference between interest rates and the inflation rate is relevant.
This also applies to investors.
Unfortunately, the public discussion - including economists - does not take this into account at all.
If the ECB now raises nominal interest rates as inflation expectations rise, real interest rates will remain constant.
In terms of real interest rates, we don't have a restrictive monetary policy, but a neutral one.
If the ECB does not compensate for rising inflation expectations, it would add fuel to the fire.
Conversely, does that mean that the ECB should quickly cut interest rates again if energy prices fall?
That depends on how high the so-called core inflation rate is.
This concept excludes energy prices and unprocessed food.
The core inflation rate in the euro area is 5.5 percent.
Before the ECB can cut interest rates, it has to come down too.
At 5.5 percent, the core inflation rate is also well above the target level. Doesn't that show that the current inflation is also demand-driven?
No, it only shows how the energy price shock affects general price and wage developments.
We will now get wage increases above the 2 percent inflation target.
I suspect the unions will push through wage increases of 5 to 6 percent.
This is unsatisfactory for the workers, because they still have a loss in real wages.
But it's still more than would be consistent with the ECB's inflation target.
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Do you fear a wage-price spiral?
I don't know if you can call it that.
According to the classic wage formula, wages should rise in line with the ECB's inflation target plus productivity developments.
The latter is probably even slightly negative.
According to this formula, wage increases should be somewhere around 2 percent.
This is of course totally unacceptable.
Some prominent voices are of the opinion that the expansionary monetary policy of recent years is responsible for inflation. Does that sound logical?
The money supply has steadily increased since the introduction of the euro.
In the phase of the zero interest rate policy, however, it rose less than before.
This means that the basic assumption that the ECB printed too much money during this phase is wrong.
"Since we don't know whether we'll get through the winter energetically, it's better to let the prices work and help out the households with transfers."
Peter Bofinger
A more restrictive line would not be a solution to compensate for inflation?
The ECB can make monetary policy so restrictive that we get deflation, which compensates for the rise in prices in the energy sector with price cuts in the other areas of the economy.
But no one can seriously advocate that.
What role does fiscal policy play in the current situation? So what can the federal government do now?
There are two possibilities.
The federal government can intervene in the prices.
This can be done, for example, via the tank discount or a lower value added tax.
These measures have the advantage of lowering inflation.
At the same time, however, people have less incentive to save energy.
What is option number two?
Since we do not know whether we will get through the winter energetically, it is better to let the prices work and help out the households with transfers.
Isn't that exactly what the federal government is doing with its relief package?
The latest relief package is unfortunately an air number.
It doesn't really relieve, but above all avoids burdens.
What do you mean?
By balancing out the cold progression, for example, no one has more money than before.
The measure only prevents an even higher burden from the progressive tax rate.
Without this measure, people would have to pay more taxes despite falling real wages.
The same applies to the reduction in VAT on gas.
It is still no relief if the state does not enrich itself from the higher gas price.
What are you asking for instead?
A generous relief package worthy of its name.
It must contain an energy allowance that is taxed so that higher income earners get less of it.
I could imagine excluding top earners from this.
The federal government should pay at least 500 to 1000 euros to every citizen.
But that doesn't help the master baker much either. How do you intend to save companies from bankruptcy?
I advocate government loans from the KfW Bank.
They should be purposeful and cheap.
KfW can reclaim them if energy prices fall again.
Where is the money supposed to come from?
The state has no financial problems.
In international comparison, the level of debt is extremely low.
That is why the discussion about the debt brake is also quite absurd.
I like to choose the following image: The debt brake is similar to when the fire brigade runs into a burning house and the housewife says "boots off" so that the carpet doesn't get dirty.
That means we have to prioritize better.