MNI INTERVIEW: German Wages, Gov't Spending, To Fuel Inflation

German wage increases are likely to run at an annual 5-6% over the coming quarters, further stoking inflation already fueled by public spending at levels sufficient to risk the reputation for solvency of Europe’s biggest economy, a senior government advisor told MNI in an interview.

With unions like Verdi, which represents postal workers, pushing for awards as high as 15%, secondary inflation is assured, said Thiess Buettner, a member of the Finance Ministry’s Academic Advisory Board and chair of the German Stability Council’s independent Advisory Board. (See MNI: Tough Spanish Pay Talks Key For Inflation Struggle)

Consumer prices should rise by 7% over 2023, said Buettner, who argues that coalition government spending plans are not only inflationary but, in their failure to comply with the country’s debt brake rule in the wake of the Covid pandemic and the energy crisis, are risking Germany’s standing among investors.

“What we are trying to test in Germany is how far can we go before the traditional view that Germany is a fiscally prudent country is no longer the common view of the financial market,” he said, drawing parallels with the UK, where former prime minister Liz Truss and chancellor Kwazi Kwarteng roiled markets by bypassing the Office for Budgetary Responsibility before presenting plans for tax cuts.

NON-COMPLIANT

“Even a developed economy that is well established and has a track record of meeting all its commitments may come under pressure if questions regarding fiscal sustainability are not properly dealt with,” Buettner said.

“Germany is not fully complying with EU fiscal rules,” he said, noting that if 2022’s budget deficit is 3% of GDP then it should be cut each year in 0.5% steps to 1% by 2026. “The current fiscal plan, however, predicts that the deficit will stay at 1.5%.”

While Finance Minister and Liberal party leader Christian Lindner has pledged to bring spending in line with the debt brake this year, Buettner said investors could be unnerved by the belief among the Liberals’ Social Democratic and Green Party coalition partners that structural problems such as the energy transition are best met by running up public debt.

“If the finance minister succeeds in shaping financial planning in such a way that the deficit falls over the years, the situation will ease,” he said, “If the deficit becomes entrenched over the further course, the pressure is likely to increase. This would be the case from 2024.”

LONG-TERM CHALLENGES

Germany’s economy has performed better than expected over the past 12 months, but its overall trajectory is “worrying,” said Buettner, Chair of Public Finance at Friedrich-Alexander University.

The move from coal and nuclear power to liquified natural gas will keep energy prices elevated, raising doubts about the viability of core industries, while attempts to shift car production towards electric vehicles are complicated by “considerable” labour shortages, demographic change, and a post-Brexit strategic reformulation of EU policy less favourable to Germany.

“The fundamental question that arises here is how we design the future of the German economy. To what extent do we follow the traditional spirit, according to which a market-based solution is the most efficient way to address those challenges, given clear guidelines and relying on economic incentives.”

Housing’s role in propping up inflation has also been underestimated, he said, with large-scale government investment to meet a shortage of homes likely to crowd out private sector activity, while further inflating public budgets.