MNI INTERVIEW: Europe Faces Slow Growth- German Gov't Advisor

Germany and Europe face an extended period of sluggish growth as high interest rates choke investment, increase unemployment and sap consumer confidence even as inflation falls, a senior adviser to the German government told MNI.

While success by the European Central Bank in “considerably” reducing inflation would help a revival in consumer confidence, the likely accompanying increase in unemployment would drag sentiment down again, said Lars Feld, personal economic adviser to Finance Minister Christian Lindner

“The net result of reducing inflation rates, and then, perhaps, the negative outcome in the labor market is not clear to me,” Feld said in an interview. “I fear that consumer confidence will not come back quickly, at least not in Germany, and probably also not in Europe.”

He added: “I expect stagnation in Germany and small growth for the EU, but actually the latter rather also is in a stagflationary environment.”

NO GREEN MIRACLE

Feld was “hesitant” to predict a quick recovery in the second half of this year after Germany’s economy entered technical recession in the first quarter, citing high energy costs and geopolitical instability. The green transition is also unlikely to act as a catalyst for near-term growth.

“The idea of the Chancellor that we are going to have a second economic miracle in Germany because of the transition to climate neutrality is some way off reality,” he said, adding that the country lacked the labour force to sustain high growth rates.

Despite German wage increases picking up pace, with a 5.5% salary hike kicking in for 2.5 million public sector employees from March 2024 and the largest trade union IG Metall agreeing general increases of 5.2%, workers have still lost spending power since inflation began to surge, Feld said, adding that wages will increasingly feed headline inflation, with firms likely to pass on higher labour costs to consumers.

The Finance Ministry, with Free Democratic Party [FDP] leader Linder at the helm, remains set on helping to cap the increases in prices by making fiscal policy more restrictive, Feld said, despite payments to off-budget funds for defence or pandemic-related needs. (See MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance)

“When you look at what is actually paid out of these special funds and what the government is finally realising as a deficit, I think we are going to observe a reduced deficit in the course of this year and next year,” Feld said. “This is what the finance minister is trying to achieve, and currently he is on track.”

SUBSIDIES TURN PERMANENT

But Feld reacted sceptically to plans by Economy and Climate Change minister Robert Habeck for EUR4 billion in annual subsidies for firms’ energy costs until 2030, noting that such subsidies are hard to remove once established.

“Habeck says that such a subsidy would only last for, say, five years, and then electricity is going to be cheap, because we will produce it by renewable means,” Feld said. “If this were the case, industry wouldn't have to demand a subsidy because they would expect lower prices in the future, which they can contract over a four-year-period already. Therefore, it is clear to me that nobody in the market expects the electricity prices to become cheaper, and this is spilling back to the problems that we are going to have with these subsidies: they will become permanent.”

Berlin should also resist calls for compromise in drawn-out talks over reforming the European Union’s fiscal rules contained in the Stability and Growth Pact, and should insist that countries in excess of permitted levels should reduce their debt by 1% of output a year and not 0.5%, Feld said. (See Spanish Elections A Blow To EU Fiscal Reform-Officials)

“The actual problem that we have is over- indebtedness in several EU member countries,” he said. “Simply giving in and saying let's follow the EU Commission and allow those countries even higher public debt - and this is what the proposal by the Commission ultimately says - is the wrong way to proceed. If only Germany finally decided to oppose this deal, this would be a clear signal to the markets to go to the highly indebted countries and ask for higher risk premia. If this is what Europe wants, walk on.”