lindner1_JOHN MACDOUGALLAFP via Getty Images_germanfinanceministry John Macdougall/AFP via Getty Images

A New Fiscal Strategy for Germany

The German economy must contend with not only the shocks of COVID-19 and Russia’s war on Ukraine but also several major medium- and long-term challenges. Against this backdrop, the country needs a fiscal policy that boosts sustainable growth through supply-side measures without further stoking inflation.

BERLIN – The extraordinary shock of the ongoing COVID-19 pandemic and the impact of Russia’s war of aggression against Ukraine are reverberating throughout the German economy. Sharp increases in the prices of energy and raw materials, as well as continued and new disruptions to global supply chains, are postponing economic recovery. Consumer and producer prices are rising at their fastest rate in a half-century, while forecasts for GDP growth are being revised downward.

In addition to these shocks, Germany is facing major medium- and long-term challenges that could further dampen growth and contribute to higher inflation. For starters, productivity growth has fallen sharply since reunification in 1990 and has remained low since the 2008 global financial crisis. Higher productivity is key to longer-term economic growth, competitiveness, and price stability.

Moreover, demographic change in Germany will accelerate sharply, with the ratio of retirees to the working-age population set to rise markedly in the second half of this decade. This will put increasing pressures on social security systems and labor markets, where limited access to skilled workers, already a problem, will constrain the economy’s medium-term growth prospects.

To continue reading, register now.

As a registered user, you can enjoy more PS content every month – for free.

Register

or

Subscribe now for unlimited access to everything PS has to offer.

https://prosyn.org/PK12og8