Former German Chancellor Ludwig Erhard

Former German Chancellor Ludwig Erhard


[M]: J.H. Darchinger / Friedrich-Ebert-Stiftung; Getty Images

From Inflation to Recession Is Germany's Prosperity at Risk?

Germany is facing a deep crisis, with inflation is reaching record levels and recession on the horizon. Even the middle class has begun to feel the pain.

Part of Ulrich Schneider's job description, as chief executive of the Paritätische Gesamtverband, an association of German social movements, is describing the situation of the poor in Germany as being particularly precarious and threatening. He’s been doing so with great regularity for more than 20 years. But what he described last Wednesday at the presentation of the Poverty Report 2022, titled "Between Pandemic and Inflation," in Berlin exceeded the usual warnings. Schneider spoke of "dramatic findings" and "brutal" effects, and warned: "Germany is in danger of simply disintegrating at the bottom."

Not since reunification have there been as many poor people in Germany, Schneider said, with the number of impoverished in the country hitting 13.8 million in 2021. Never before have more children and elderly had to live in poverty in the country, and the poverty rate has never risen as rapidly as it did in 2020 and 2021, he said. Even among the employed, there is a growing number of people who don’t have enough money for a life with social and cultural participation. Among the self-employed, in particular, there has never been such a marked uptick.


[M]: J.H. Darchinger / Friedrich-Ebert-Stiftung; Getty Images

The article you are reading originally appeared in German in issue 27/2022 (July 1st, 2022) of DER SPIEGEL.

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And the figures Schneider cites are from 2021. Last year, inflation and rising energy prices played a much smaller role than they do now. What will the situation be like this autumn when back-payments for electricity and gas start to arrive in mailboxes around the country? Schneider believes that at the lower end of society, "sheer desperation" will then prevail, but he also believes that the usual supplementary bills for energy costs not covered by advance payments will also "hit home" for parts of the middle class.

There are many experts and politicians who paint a gloomy picture of Germany’s near future. But they're not the only ones full of pessimism. Despite government measures to relieve the strain, such as the abolishment of the Renewable Energy Sources Act (EEG), a tax to subsidize the expansion of green energy in Germany, and one-off payments, almost a quarter of all Germans say they are "extremely heavily" or "heavily" burdened by their financial situation, according to a representative survey by the Hans Böckler Foundation, a think tank closely aligned with trade unions. Many Germans are already going without vacations, new clothing or even food.

Record High Prices

Prices have already hit record highs in Germany and at 7.6 percent, inflation is higher than ever before in reunified Germany. Prices rose slightly less rapidly in June than they did in May. But that might merely be the result of a break in the gasoline tax and the introduction of a 9-euro-a-month nationwide public transportation ticket from June through August. Once these temporary subsidy campaigns expire, there could be another sharp upward jump in inflation. Exorbitant increases in energy prices, particularly, are a threat to both consumers and companies. The economy could also slide into a deep recession, with the threat of many job losses.

Is the German model of prosperity in danger? There is much to suggest that the crisis could also create difficulties for the middle class here. Politicians are viewing the situation with great concern because the middle class is a pillar of support for the state and democracy, with its political convictions, its commitment to work and its desire for stability. If the middle class falters, so too could everything else.

No one knows what might happen if prosperity dwindles drastically. And no one wants to know. Which is why everything is being done to prevent precisely that from happening. Just look at the pandemic. The government spent billions of euros to stabilize the country economically and socially. But if the state had to step into every financial gap, it would quickly be overwhelmed. As such, the debate is over who should be helped and who should not.

Perhaps the best comparison for the current situation is the oil price crisis of 1973. But that produced relatively minor disruptions to the global economy. This time around, several crises are coming together at the same time, with the threat of recession in many industrialized nations, led by the United States. The coronavirus pandemic, with its disruptions to supply chains. And, of course, Russia’s attack on Ukraine and its devastating impact on energy prices.

"We're Heading into Tough Times"

"We’re heading into tough times," believes German Vice Chancellor Robert Habeck. "And we’re not yet at the end," he says. What makes the situation so troubling is the outlook. Even though many things – from zucchini to LED screens – have already become significantly more expensive, producers haven’t yet fully passed on their higher costs to consumers.

Many people are preparing to significantly cut back on spending in the future, even when it comes to buying simple everyday items. The Hans Böckler Foundation’s survey found that 39 percent plan to buy less food and beverages, 10 percent of them significantly less. Ulricht Kater, chief economist at DekaBank, says that perceived inflation is currently at almost 18 percent. He says this is a product of consumer confidence, which has collapsed entirely. "That’s a drag on the economy," the economist says. Because if people consume significantly less, that will strangle economic growth even faster.

Some economic forecasts for Germany are already at a meager 1.5-percent growth, and that’s only if Vladimir Putin doesn’t turn off the gas tap completely in the end. The German government, though, is making preparations for precisely that eventuality. Things will become clearer on July 21. For the last two weeks, only 40 percent of the usual volume from Russia has been flowing through the most important gas pipeline, Nord Stream 1. In July, as with every year, the pipeline is serviced and shut down for this purpose. In the past, full deliveries have resumed after 10 days at the latest. Government officials, gas suppliers and industrial leaders are anxiously wondering if that will be the case this year as well.

If it's not, certain industries that require significant quantities of natural gas would likely have to shut down in the winter . For some industries and their employees, that would be catastrophic, with the loss of tens of thousands of jobs virtually guaranteed. If Russian gas ceases to be available during the second half of the year, from July onward, Germany’s gross domestic product could slump by 12.7 percent, according to a study by the Prognos Institute commissioned by the business community of the state of Bavaria. Germany would "slide into a deep recession," fears Prognos Chief Economist Michael Böhmer. "Overall, around 5.6 million jobs would be affected by the consequences," says Bertram Brossardt, head of the Bavarian Business Association.

Scholz Fears a Wage-Price Spiral

Ultimately, July 21 could become a fateful day for Germany. If the pipes remain throttled, the federal government would then likely declare the third and highest threat level for Germany’s gas supply. Economics Minister Habeck of the Green Party has already declared the first two levels. The result would be that gas prices would continue to soar. Klaus Müller, the head of the Federal Network Agency fears that bills could triple in the fall.

Such scenarios have some in the federal government concerned about possible social unrest in the country. There are contradictory signals coming from the business-friendly Free Democratic Party (FDP). Because the risks are historic, German Chancellor Olaf Scholz said in June: "I want to call workers, their unions and employers together for concerted action."

A "concerted action" by the German government in 1968 had little impact.

A "concerted action" by the German government in 1968 had little impact.

Foto: Alfred Hennig / picture-alliance / dpa

So far, inflation has been driven by one-off shocks such as the Ukraine war. But the chancellor is concerned that it could become entrenched at a high level in the longer term and trigger what is known as a wage-price spiral. Strong wage increases in response to inflation would drive up production costs, leading to companies raising prices and possibly leading to higher wage demands by unions.

This week, Scholz met with the heads of unions and employers' associations in the Chancellery to discuss how to counter the trend in prices. Representatives of the German central bank, the Bundesbank, and the Council of Economic Experts also participated. The aim: "To give employers financial breathing room without overburdening employers and fueling inflation risks," Scholz said.

A Bumpy Start

Ultimately, though, policymakers have only limited influence on inflation. Most importantly, they can mitigate the consequences and distribute losses more equitably. The European Central Bank has more power and can halt price developments by raising interest rates.

But Scholz's concerted action got off to a bumpy start, largely due to the chancellor's poor communication. It wasn't just that his announcement came as a surprise to most members of government, union leaders and employers, but the explicit reference to the "concerted action" of 1967, also evokes rather unpleasant memories, especially among the trade unions.

That year, during the era of the first "grand coalition," a government pairing the traditional rivals, the conservative Christian Democrats (CDU) led by Chancellor Kurt Georg Kiesinger and the center-left Social Democrats (SPD), SPD Economics Minister Karl Schiller initiated the effort. In a concerted action, a round table comprised of politicians, the Bundesbank, trade unions and employers were supposed to ensure stability and growth during a recession that year. They weren't successful.

Employee representatives rejected wage demands as an encroachment on the autonomy of collective bargaining. Because the economy recovered faster than expected, corporate profits had gone through the roof by the end of the 1960s. Within industry, workers began to fight for higher wages in official industrial actions known as wildcat strikes. The unions quickly gave up their initial resistance and entered the ensuing rounds of negotiations with high demands – triggering the first and only wage-price spiral in the history of postwar Germany.

Scholz's only concrete proposal to date to provide any social cushioning – to employers to make tax-free special payments to their employees – has met with skepticism and even rejection from the social partners. "Collective bargaining isn't conducted in the Chancellery," Yasmin Fahimi, the new head of the trade union DGB, said coldly. Rainer Dulger, the president of the Employers' Association, was similarly critical. "Collective bargaining isn't done in the federal parliament," he said.

It's not that the labor unions have anything against tax-free special payments in principle, but they don't want to trade them for regular wage increases in the upcoming collective bargaining rounds. That, at least, was is how Scholz's proposal has been interpreted. Those close to the chancellor have begun insisting that Scholz had no such intention.

"Basic Welfare Payments Aren't Enough"

After years of frequent one-off payments, there is considerable pressure on companies to finally provide permanent salary increases, especially given that many prices, particularly those in the energy sector, will not return to their old levels anytime soon. Three major collective bargaining rounds are set to take place over the next six months – in the metal and electrical industries, the chemical sector and the public sector – affecting a total of around 7 million workers.

The center-left Social Democrats are also unenthusiastic about the idea of a tax-free, one-off payment. "That can only be part of the solution," says Wiebke Esdar, head of the left wing of the SPD in parliament. She is calling for a whole raft of measures to counter the effects of inflation. "We need to do something for retirees now, and we need to raise basic welfare payments and provide relief for people with low incomes."

Jessica Rosenthal, the head of the youth wing of the SPD, goes even further. She wants to extend the 9-euro-a-month public transportation tickets introduced temporarily this summer beyond the planned three months and to ease financial burdens for students and people receiving vocational training. "Many young people have existential fears and great anxiety about the next gas bill," she says. That's why she argues that the federal government needs to move to prohibit utility companies from cutting off people's electricity or gas for nonpayment and setting up a hardship fund to help deal with the problem. In the case of Germany's basic long-term welfare payment, social organizations are calling for an increase from the previous 449 euros a month to 600 euros. Ricarda Lang, the co-chair of the national Green Party, holds a similar view. She also argues that the basic welfare payment, known in Germany as Hartz IV, must be increased. "We can't allow ourselves to be satisfied with the fact that in our rich country, basic welfare payments aren't enough to live on," she says.

"People are asking themselves: What's next?"

Helge Lindh, member of parliament with the SPD

But Helge Lindh, a member of parliament with the SPD party, says that doesn't go far enough. In his constituency of Wuppertal, he says, there are many long-term unemployed, and one-third of children there live on social benefits. Lindh would also like to see relief for low-income earners. "We need to focus on the group that has always just scraped by," he says. "They have zero reserves and are the unheard, the excluded." He says people are coming up to him who never complained before who are now upset about the price of milk, butter and meat. "There's a lot of helplessness and fear of slipping into poverty," Lindh says. "People are asking themselves: What's next?"

There is agreement in the SPD on the "social climate money" that Labor Minister Hubertus Heil (of the SPD) has proposed. The idea calls for single people earning less than 4,000 euros before taxes and married couples earning less than 8,000 euros a month together, would be provided with relief. "That needs to happen now," says SPD youth wing head Rosenthal. "Lindner needs to finally deliver. We can no longer wait until 2024 to implement it."

But Christian Lindner, the German Finance Minister with the FPD party, isn't even thinking about it. He considers many of the proposals from the left side of the coalition government camp to be expensive and harmful and fears that the additional assistance could further fuel inflation because it could strengthen demand and thus drive up prices even more.

Instead, Lindner is now recommending his old pet project as a means of fighting inflation: straightening out the cold progression. Under that proposal, earnings limits in a person's income tax are increased by the rate of inflation. This prevents taxpayers from moving up into higher progression brackets and having to pay more in taxes, even if their salary increases only compensate for the loss in purchasing power. Lindner believes that if the Finance Ministry returns its inflation gains to taxpayers in the form of income tax, it doesn't bring additional purchasing power into the economic cycle – it instead stabilizes demand.

But if workers and unions knew that they wouldn't lose any purchasing power, they wouldn't have to try to compensate for inflation in the upcoming collective bargaining rounds. Linder's hope is that the notorious wage-price spiral can be prevented in that way.

But the likelihood is that none of these proposals will do anything to decisively halt inflation. The reason is that nothing is driving inflation more than the rise in energy prices. The high prices are initially borne by the utility companies, which have to stock up on the spot markets for a lot of money. Most of their private customers have relatively favorable supply contracts with prices fixed for several months.

That's why many gas companies are threatened with billions in losses, and for some it could mean bankruptcy, which in turn could lead to the end of other companies – a domino effect that Economics Minister Habeck, alluding to the 2008 financial crisis, calls the "Lehman Brothers effect." Gas suppliers would be at risk for millions of households, as would those of major industrial customers.

Incalculable Increases in Prices

To prevent that, the government would have to spend billions to save the utilities from bankruptcy. Or it will allow them to pass their massively increased purchase prices on to their customers. A price adjustment clause in Germany's Energy Conservation Act makes that possible. That, however, would be an immediate shock that would further accelerate the already growing social upheavals. "For quite a while now, it has no longer just been people with little or no income who have been affected by the high prices," says Jutta Gurkmann, until last week the executive director of the Federation of German Consumer Organizations.

At their information centers, consumer organizations are observing how hardship is slowly making its way up through the societal strata, all the way to the middle class. "If gas suppliers pass on the high prices in full, many will no longer be able to pay their bills," Gurkmann fears.

The demands on the government are coming from every direction. It doesn't matter whether it protects gas suppliers from bankruptcy with billions or provides relief to its citizens. Habeck's Economics Ministry is currently working on catch-all system for gas utility companies. As an alternative, gas prices could be frozen for consumers. The differences to the real costs on the gas market would then be covered by the state or would be distributed to all gas customers in the form of a levy. The steps are intended to prevent incalculable increases in prices for consumers.

Habeck's staff are also planning further relief. Ministry officials say relief can no longer be handed out with a watering can. "There simply isn't enough money there for solutions like the fuel rebate," says a senior official. At the same time, however, the relief also isn't intended to drive inflation any further. And, of great importance to the Green Party economy and climate minister: They shouldn't reduce the public's motivation to save energy. "Ultimately," the official says, "we want to reduce our dependence on Russia's energy as well as our CO2 emissions."

As such, the Economy Ministry is focusing on state money that is paid out on a per-capita basis, as with the energy money from the second relief package. As part of it, everyone would get paid a fixed sum. In addition, it would also be possible to intervene directly in the energy market. That consideration is being made in the ministry, but especially at the level of the parliamentary group of the Green Party in the Bundestag. A government purchasing cartel could be formed for buying oil, and the same could be done at the EU level for gas. Already, most of the 27 EU member states are connected by a common pipeline network.

"The situation has changed dramatically."

Kevin Kühnert, SPD general secretary

"I could imagine joint European purchasing and clear price declarations for gas," says Green Party budget policy expert Sven-Christian Kindler. He also has the backing of fellow Green Party member Anthon Hofreiter. "We could trim the exorbitant profits of the corporations with price caps or purchasing cartels," says Hofreiter, who is the head of the European Affairs Committee in the Bundestag. "And when it comes to imports from Russia, we transfer less money to Putin for his war chest."

Among the SPD and the Greens, there is also a growing desire to have companies and the rich share the costs of the crisis. There could be, for example, an excess profits tax. The special tax would be levied on corporations that benefit especially from the situation on the energy markets. But the FDP has so far rejected the idea, citing the coalition government agreement.

Top Earners on the Radar

But SPD General Secretary Kevin Kühnert says he doesn't want to accept that. "The situation has changed dramatically since December," he says. "An excess profit tax would be fair and would be in line with the coalition agreement: no additional burden on top earners in the middle of society." Politicians in the left wing of the party go even further, taking aim at top earners. "We need to talk about taxing very high incomes, because the government's relief measures need to be financed somehow," says Wiebke Esdar, the head of the SPD's left wing in parliament. She also sees it "as a start to redistribution and a sign of fairness in times when people are afraid they won't be able to pay for their heating or food." Party youth wing head Rosenthal says she would like to see a "crisis solidarity payment from top earners." She also advocates a wealth tax and an increase in the inheritance tax.

Similar tones are coming from the Green Party. "We need a redistribution of hardships," says Katrin Göring-Eckhardt, the vice president of the Bundestag for the Greens. "The rich and those who accumulate excess profits will have to give up something. We are all the state and that also means that everyone has to contribute. Anyone who calls for people to work overtime like the finance minister has not understood what this crisis means for the hard-working populace." Meanwhile, referring to the FDP, Green Party co-chair Lang says: "We all have to question old certainties. We Greens have shown that in (support for) arms shipments and LNG terminals," for example.

Lindner and his FDP, however, reject tax increases – even more firmly than usual at this point in time. Their argument is that economic growth is weakening noticeably because of the war in Ukraine, and higher taxes would be toxic for the economy.

Lindner and his FDP are particularly allergic to the proposal by the SPD and the Green parties to raise taxes on the highest bracket, which applies to most companies. By international standards, Germany is already a high-tax country for companies. The defensive reactions against a wealth tax are even greater. The FDP considers it to be particularly harmful from an economic point of view because it also applies when a company posts losses. In addition, it is administratively costly, but doesn't yield much by way of fruit.

Annoyance with the FDP

Within the SPD leadership, there are currently few illusions about the chances of a wealth tax getting approved. Kühnert says he understood the FDP during the campaign to mean that it wanted to ease the burden on the working middle class. "Now, however, we are in the unfair situation of having to pay additional health insurance contributions on normal income because the FDP doesn't want to impose an excess profits tax on those who profit from the crisis." He also wonders "whether this can really be the last word from the liberals (FDP)."

Meanwhile, FDP leader Lindner appears to be determined to remain steadfast on the issue of maintaining Germany's balanced budget law and not allowing any tax increases, even if it leaves the SPD and the Greens in the cold. SPD youth wing head Rosenthal considers this to be "irresponsible."

"Christian Lindner has to face reality and stop living in a wonderland for the richest 1 percent of society," says Rosenthal.

The Greens are also growing increasingly annoyed by the FDP's blockage mentality. "This coalition wants to be a coalition of progress," says Bundestag Vice President Göring-Eckhard. "But to make progress, you have to release the brakes. We can do better there, definitely." A leading Social Democrat politician believes the FDP is "highly nervous" after recently losing three German state elections. The Greens, on the other hand, she dismisses as being "like a bag of fleas," with a specialist politicians rearing their heads each day with an uncoordinated idea.

At the same time, all three parties in the government coalition are cognizant of the potential for social division the issue holds. And the degree to which it could play into the hands of populist parties.

The fractured, far-left Left Party is already lurking, awaiting its chance to attack the government from the left. With a view to the Ukraine war, party deputy head Lorenz Gösta Beutin already sees a possibility for where the money for relief should come from. "Our demand is that those profiting from the war should pay," says Beutin. He is expecting the political situation to grow tense this autumn. "There will be fierce protests for sure," he says. "As the left, we will work to ensure that they aren't exploited by the right and that there is more social justice and climate protection in equal measure."

At the right-wing populist Alternative for Germany's (AfD) party conference in mid-June in Riesa in the eastern state of Saxony, anticipation of the coming crises was evident despite all internal differences. Guido Reil, a member of the European Parliament and former SPD member from the Ruhr region, drove his "Cold Bus" for the homeless to the front of the hall hosting the party conference in blazing heat. During the winter months, it becomes a winter bus that he drives each week to places where homeless people live. This time, he says, the bus was not only practical for transporting advertising material to Riesa – "I also got some great pictures with it," says Reil. For him, it's clear: "Everything is shooting up – everything is getting more and more expensive, and the social factor is the future of the AfD."

In Riesa, Alice Weidel, the new co-chair of the party, set the tone. "A 10-percent inflation rate is nothing – we will see more," she shouted to delegates. "What do we think is actually going to happen in this country?" Only the AfD can solve the coming problems, she said.

The party is supporting a campaign to warn of a puported blackout, a widespread power outage lasting for days. In the eastern state of Thuringia, the state party chapter of the right-wing extremist Björn Höcke, money from the party's group in the state parliament is already being used to print related flyers. A video on Hocke's Facebook page shows a vivid depiction of how the AfD envisions the crisis: In it, all the lights in his apartment go out.

Is there a threat of a yellow vest movement in Germany, too, like in France, where disillusioned people from both the right and left political fringes joined forces against the establishment and paralyzed the country with protests?

The good fortune of the German government could be that the Left Party and the AfD are currently in disarray. Both parties have months of political wrangling behind them. The AfD has become so unprofessional that it didn't even manage to end its party conference as planned.

The fact that the parties are in such bad shape is probably one of the few things reassuring the government coalition in Berlin right now.

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