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Inflation: Germany seeks to defuse social 'time bomb'

July 4, 2022

German Chancellor Olaf Scholz is under pressure to ease spiraling inflation. His plan is to come up with measures at a meeting of business leaders, trade unions and politicians. But they have very different ideas.

Olaf Scholz mit Yasmin Fahimi und Rainer Dulger
Image: John Macdougall/AFP/Getty Images

Leaders of trade unions and industry associations met at the German chancellery on Monday to begin what was called a "concerted action" to get the country's cost-of-living crisis under control.

Exacerbated by Russia's strategic strangling of Europe's gas supplies, inflation has risen to 7.6% in June in Germany, with politicians and senior officials already warning that energy needed to be conserved ahead of the cold season this autumn.

"Citizens need to get by in their everyday lives," Chancellor Olaf Scholz said in an interview with public broadcaster ARD on Sunday. "And if the heating bill suddenly rises by a few hundred euros, then that can be a sum that many people can't really cope with." The crisis, he added, was a "social tinderbox."

One-off payments or wage hikes?

The chancellor went on to deny a story that had been through the German media over the weekend: That he was planning to resolve the issue with tax-free one-off payments.

Such one-off government payments, especially for heating bills, have been floated in the past week by members of his center-left Social Democrat Party (SPD), but the government has been keen to underline that this was just one of many measures being considered.

Marcel Fratzscher, president of the German Institute for Economic Research (DIW), was among several economists to say that any solution needed to be long-term, not a one-off deposit for employees. "Only higher wages and social benefits will compensate the damage for people on middle or low incomes," he told the DPA news agency.

For their part, the major trade unions have already promised to negotiate hard. The heads of Germany's two largest unions, IG Metall, which represents 2.26 million industrial workers, and ver.di, the service workers' union, both stressed that wages needed to keep pace with inflation, to protect the most vulnerable in society.

People queuing up outside the Tafel Oberhausen
The Tafel NGO, which hands out free food, has seen a dramatic rise in demandImage: Volker Witting/DW

But Holger Bonin, research director at the Bonn-based Institute of Labor Economics (IZA), pointed out that Germany's lowest-income sectors, which have grown significantly in the last few years, are not represented by unions anymore at all. "It's a very porous measure, really, because it misses a lot of people who might need it," he told DW.

The "concerted action" talks are to last into the fall and few expect early breakthroughs. A government spokesman tried to manage expectations on Monday: It would be about agreeing on a process rather than coming up with instant solutions, he emphasized, and the aim was to cushion the blow to people's incomes while avoiding a so-called "wage-price spiral."

The wage-price spiral myth

Fratzscher called that concept a "false myth," and warned against using it during the concerted action to try to stop workers from demanding higher wages. The income trend, in general, had been too low rather than too high, he said. "The more that buying power shrinks, the bigger the damage to the economy," Fratzscher said.

Opposition politicians meanwhile were already criticizing the chancellor's approach. Indeed, the "concerted action" is a procedure that has some resonance for older Germans, especially the SPD voters: It was first invented in 1967 by SPD Economy Minister Karl Schiller when the "economic miracle" that followed World War II first began to stutter.

Schiller instituted an informal round of regular talks between employers, unions, and the government in an attempt to fight growing unemployment. The talks proved difficult, but lasted more than a decade, before eventually breaking down in 1978.

black and white photo of (left to right) Fritz Berg (industry representative),  Karl Schiller (Economy Minister), Ludwig Rosenberg and Otto Brenner (trade union reps)
In 1967, SPD Economy Minister Karl Schiller (2l) started informal talks talks between employers, unions, and the governmentImage: picture-alliance/popp

"The concerted action is of course a well-loved historical term that sounds good," labor researcher Bonin said. "It's certainly good for them to talk, to exchange information, and build trust in the common goal." But he also pointed out that Germany has always enjoyed certain stability and compromise between industry employers' associations and trade unions, even without the government moderating talks.

"It's just a label for a dialogue process," he added. "The concerted action in the 60s had a very different starting point: It arose when a long period of almost full employment came to an end and the first significant unemployment began."

The opposition has also expressed skepticism about the format. "In the face of the opening position, we're curious to see what will come out of a two-hour meeting," Jens Spahn, deputy parliamentary leader of the conservative Christian Democratic Union (CDU), told the RND news network with a note of sarcasm. "What we need now is permanent and targeted income tax relief, so that there's more left over for low and medium incomes." Spahn also said the electricity tax should be lowered.

Then again, tax relief is also more likely to benefit higher-income earners, according to Bonin. "There are employees who have such low income that they don't pay any income tax at all," he said. "And that's quite a few people in Germany."

a child watches on as an adult opens her purse to find fifteen euros
Around 13 million Germans are already affected by povertyImage: Ute Grabowsky/photothek/picture alliance

The government parties themselves have different ideas about what to do about the cost of living crisis. The Greens have already claimed that their most recent idea — a €9 ($9,40) ticket for monthly travel on regional and city transport across the country — has been a success, and many are already calling for the scheme to be extended beyond the summer, though Chancellor Scholz has since ruled that out.

But arguably the more powerful coalition partner is the neoliberal Free Democratic Party (FDP), whose leader Christian Lindner also happens to be the German Finance Minister. Ahead of Monday's meeting, Lindner warned that he was against any more state expenditure.

"What we need is targeted relief, in order to reduce the loss of buying power," he told broadcaster ARD. "And then incentives so that more is produced without state money to increase productivity." He called instead for more free trade agreements or more highly-skilled immigration.

Edited by: Rina Goldenberg

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Benjamin Knight Kommentarbild PROVISORISCH
Ben Knight Ben Knight is a journalist in Berlin who mainly writes about German politics.@BenWernerKnight