MNI INTERVIEW2: See German Fiscal Curbs Despite Recession Risk

The triple-threat from rising inflation, slowing consumer spending and structural changes that could push Germany into recession is unlikely to knock it off its pledge to return to strict public debt rules next year despite pressure to spend more, an advisor to the country’s Finance Ministry told MNI.

“I'm not particularly optimistic that consumption is going to sustain the European economy at the same time as prices are rising very fast” and likely to rise further in the near-term, Klaus Adam, a member of the Finance Ministry’s Academic Advisory Board, explained.

The end of measures such as the nine-euro travel ticket and subsidised auto fuel will push inflation up in the near-term, Adam warned. Combined with soaring energy bills, the resulting hit to consumer spending will only increase the country’s economic woes.

German households are yet to reduce gas consumption significantly, Adam observed, having been shielded from price rises by a combination of fixed-price contracts, one-off direct transfers and tax cuts. But despite the “clear risk” of even more dramatic gas shortages and price increases to come, the necessity of making changes will only become visible once it is “too late,” he said.

GREEN COSTS

Meanwhile, German exporters may struggle to compete globally due to green transition costs and transport infrastructure challenges, Adam said.

“You could say we're now seeing a price change that eventually would have had to happen anyway,” he said. “But this is now going to happen very asymmetrically, much faster here in Europe, and much slower in China and the United States. In the meantime, we've got to be competitive.”

Some firms currently relocating from Germany to countries offering cheaper energy might not return in the medium-term, Adam cautioned, although this worrying trend was not confined to one country. The energy price shock was having an impact across Europe, with the highly integrated energy market pushing prices higher across the bloc, which would lead to some firms relocating to other regions with lower prices.

BLOCKED ARTERY

Adam also pointed out that the Rhine -- a key artery for moving goods and raw materials -- may also no longer be a reliable transportation route during certain months of the year, requiring investment in storage or alternative forms of transport, such as rail. However, given strained government finances, large infrastructure investments were unlikely. (See MNI: Inflationary Supply Chain Snags Easing-ECB Economists)

Free Democrat Finance Minister Christian Lindner’s determination to return to the so-called ‘debt brake’ next year made some sense in the context of a strong inflationary environment, Adam said. But recent moves to lower VAT on gas were probably intended as a precursor to a much more expensive general tax cut, he continued, albeit one partially offset by increased revenues resulting from rising inflation. (See MNI: Gas Shortages To Delay EU Fiscal Rules Overhaul-Officials)