In February 2020, the European Commission announced that it would present a plan for reforming the eurozone’s economic governance, including the rules for public debt. After a lengthy postponement due to the Covid-19 pandemic, the project is now back on the table, amid widespread calls to give governments more leeway, for example to finance climate protection spending.
There are currently increasing calls to impose a special tax on the rising profits of energy companies, also known as an excess profits tax. These companies are accused of profiting from the war in Ukraine, which has led to a shortage of energy supplies and sharply rising prices. Some politicians are stoking the mood by speaking of “war profiteers” and a “tax on greed.”
The German government’s relief package is well-intentioned. But regulation and subsidies aren’t a sustainable way to combat inflation.
In view of drastic rises in energy prices, there are increasing calls for governments to shield citizens from the burden. The French government has announced that it will reduce gasoline tax by EUR 0.15 per liter for four months starting in April. In Germany, there is criticism that the government is earning money from the increase in the price of gasoline via VAT. The claim is that the additional revenue should be returned to the citizens. Some are calling for fuels to be subject only to the reduced VAT rate of 7 percent. Since VAT rates cannot be changed at will due to European law, German Finance Minister Christian Lindner wants to introduce a gasoline rebate – people should submit fuel bills to the tax office and get a portion refunded.
The war in Ukraine is not only a military and geopolitical turning point. It is also changing the economic situation. This affects both the short-term economic trend and the medium-term prospects for growth and prosperity. The previously expected economic recovery will be weakened. There is a threat of stagflation, i.e., a combination of weak growth and high inflation. Monetary policy faces a dilemma: while interest rate hikes can curb inflation, they would further dampen growth.
Angela Merkel was said to be careful to manage expectations. Those who promise little need not fear criticism if nothing is achieved. The traffic light government is acting differently. Its coalition agreement is ambitious. It wants to massively accelerate the digitalization and decarbonization of the economy while preserving prosperity and inclusion.
In addition to the damage to health, the Covid-19 pandemic caused tremendous economic costs. What can be learned from an analysis of the economic consequences and of crisis management in politics and in society? Extensive research is now available on this, although it mainly relates to the earlier phase of the pandemic: essentially experience and data from 2020. Various lessons emerge for dealing with future pandemics. The most important concerns the question of whether there is a trade-off between protecting health on the one hand and limiting economic costs on the other.
It is not surprising that German politics is attracting much international interest. Germany is the largest economy in the EU, and the country has overcome the Covid crisis with some success. Above all, it is striking that German politics is characterized by moderation. Germany held an election in which moderate parties won an overwhelming majority. Populists from the right and left were able to score points at most in the new federal states, otherwise they did not play a major role.
Negotiations for a traffic light coalition in Germany have begun in a good atmosphere, but they will still be difficult. This is especially true for fiscal policy. Here, the task is something like squaring the circle. The green and digital transformation requires considerable private investment in addition to public investment, and the former will hardly take place without substantial tax incentives. Tax relief on investment is also important to support the increasingly fragile economic recovery. At the same time, the debt brake narrows the scope for public borrowing.
Regardless of which coalition wins out in the end: Germany needs a government that is capable of tackling major economic and political challenges. These challenges are broader than the issues that dominated the election campaign. The economic consequences of the coronavirus crisis, demographic change, climate change, digitalization, European integration, and geopolitical change require decisive action and a willingness to change.
The budgetary and fiscal policy record of the Merkel era contains both light and shade. The greatest success is that the stability of Germany’s public finances has suffered less during this period than in other countries, despite the fact that the economy had to weather the two deepest economic crises since the Second World War – the global financial crisis and the coronavirus pandemic.
The taxation of married couples in Germany has long been considered in need of reform. The current marital splitting system provides for married couples to be taxed jointly. There is always an advantage if the partners have different incomes. This is due to the progressive income tax rate: the tax rate rises with increasing income.
The dramatic flood damage in the German states of Rhineland-Palatinate, North Rhine-Westphalia, and to some extent also in Bavaria and Saxony has revived the debate about compulsory insurance for damage from natural disasters. Currently, there is no obligation for homeowners in Germany to insure themselves against flood damage. About 46 percent of all buildings are insured voluntarily, but there are large differences within Germany. In Baden-Württemberg, 94 percent have insurance, while the figure in the particularly hard-hit Rhineland-Palatinate is currently 37 percent, and in Bremen, only 23 percent.
Europe’s share of the global economy may be declining, but the EU remains a major economic power with strong ties to the rest of the world. If its pursuit of strategic autonomy devolves into a push for protectionism or even autarky, it risks losing that status – and becoming more vulnerable than ever. When it comes to economic growth, Europe has been lagging behind the world’s other major economic powers – the United States and China – for some time. No surprise, then, that the old continent’s relative weight in the global economy is declining fast. How vulnerable does this leave the European Union – and what should EU leaders do about it? When the Iron Curtain fell in 1989, the countries that comprise today’s EU, plus the United Kingdom, accounted for 27.8% of global GDP (in terms of purchasing power parity). For the US, that share was 22.2%. China, with a share of 4%, still hardly registered as an economic power. Thirty years later, the EU, together with the UK, accounted for 16% of global output, still slightly ahead of America’s 15%. The big shift was in China’s position, which had surpassed its Western counterparts with a share of 18.3%.
The Executive Board of the European Central Bank (ECB) wants to make monetary policy “greener.” Hardly a week goes by without the topic being promoted by one of the board members. In addition to the visible effort to make the traditionally dry seeming monetary policy appear practically helpful and close to the people, the ECB’s activities in the matter itself amount to a further significant expansion of its competencies. This involves, first, independently assessing the environmental friendliness of projects financed by corporate bonds; and second, giving preference to positively rated projects in various securities transactions.
The debt brake enshrined in Article 115 of Germany’s constitution has been the subject of controversial debate since its introduction in 2009. Critics argue that in the event of major economic slumps, the maximum permissible deficit for the federal budget of 0.35 percent of gross domestic product (GDP) is too small, even when adjusted for cyclical effects. The debt brake also leads to an excessive reduction in government debt and creates incentives to neglect public investment. Moreover, interest rates are so low that significantly more government debt can be afforded.
No-Covid does not mean that lockdown measures will be endlessly extended or even tightened until the virus disappears. Coronavirus crisis management in Germany, as in other Continental European countries, has reached a dead end.
Even in times of the corona pandemic, environmental and climate protection are among the dominant topics in the economic policy debate. This is justified. Global warming is one of the greatest challenges of our time.
The coronavirus pandemic plunged the German economy into a severe recession. Following a recovery over the summer, growing numbers of infections give reason to fear that autumn will be difficult.
On October 22 and 23, collective bargaining in the public sector will enter its third and possibly decisive round. The trade union ver.di is demanding 4.8 percent more pay, or at least EUR 150, for federal and municipal employees. While collective wage settlements apply only to salaried employees in the first instance, they are usually also adopted for civil servants. What should we make of this demand – and what is an appropriate wage settlement in the current situation?