MNI INTERVIEW2: German Employment Gains May Prove Fleeting

Gains in German employment may prove fleeting, with new jobs added since the pandemic focussing in low-productivity areas, a senior government advisor told MNI, though he added that the country should avoid deep recession.

While post-pandemic German employment levels are up 1.3%, gross domestic product has only gained two-thirds of that, noted Klaus Adam, professor of economics at the University of Mannheim and a member of the Advisory Board to the Federal Ministry of Finance.

“It seems that everyone's afraid of firing people because of the fear of not being able to rehire. If people start realising that rehiring is going to be easier in the future, they're going to find it suddenly much easier to discontinue employment,” he said. “If that happens, structurally, the demographic transition is going to take a lot of people out of the workforce, unless we increase the length of work life.”

Foreign remote workers can also be brought in to provide some services, he noted.

NO DEEP RECESSION

While high energy prices and slower Chinese growth continue to exert a drag on Germany’s economy, the country should avoid deep recession as stabilising real wages underpin consumption and as investment and fixed capital formation are surprisingly firm, if at lower levels, he said.

But a court decision barring the repurposing of Covid-19 rescue funds towards green transition will cause a fiscal shortfall of EUR20 billion next year, and more in 2025, he said, adding that the government should react by acting to boost private investment. (See MNI INTERVIEW: Court Ruling Shaves 0.5% From German GDP-Demary)

“If we create a regulatory environment in which private business models become a profitable way to do what the state was planning to do, that could even be an efficiency enhancing substitute without undermining the common market,” he said, calling for policies including higher carbon taxes to encourage the shift to a greener economy.

“That doesn't mean that there's going to be a tightening in terms of overall investment, rather it would be a substitution of public investment by private investment. But it is politically difficult, because you can't hide as easily anymore the costs of the transition,” he said.

The loss of funds means Germany’s government has suffered reputational damage, Adam said, with a EUR10 billion subsidy promised to U.S. chip giant Intel in doubt.