German spending plan could fuel inflation – Economic institute warns
A massive German spending package aimed at boosting investment in defence and infrastructure could lead to a rise in consumer prices, according to an analysis by the German Economic Institute (IW) released on Saturday.
A massive German spending package aimed at boosting investment in defence and infrastructure could lead to a rise in consumer prices, according to an analysis by the German Economic Institute (IW) released on Saturday.
German lawmakers greenlighted a historic easing of the country’s strict debt rules earlier this week to pave the way for more defence spending as well as a €500 billion ($541 billion) package for infrastructure and climate initiatives.
While the move has been hailed in Berlin and the wider EU as an important signal of Germany’s commitment to Ukraine and rearmament, the employer-friendly IW experts warned that it could create new challenges at home.
“A debt-funded expansion of government spending has the potential to trigger inflationary dynamics if the supply side is unable to meet the additional demand,” the experts said, analyzing potential economic hurdles to the implementation of the package.
According to IW calculations, Germany’s debt ratio, which currently stands at 63% measured against gross domestic product (GDP), could rise to some 85% by 2037 under the changes.
To ensure that the additional spending is translated into an expansion of supply and economic growth, the experts recommended that the incoming conservative-led government focus on three areas: ensuring the availability of enough workers, reducing social spending and cutting red tape.
Some of the burdens on companies – such as high energy costs and bureaucracy – could be gradually reduced, the IW estimates.
“However, improved access to skilled workers and an infrastructure that promotes performance can, at best, only be achieved in the medium term, meaning higher demand could result in an initial inflationary effect, especially if politicians try to set large sums in motion as quickly as possible,” the analysis suggested.
Approving the spending package, which was preceded by intense negotiations between the conservative bloc and the Social Democrats, who are in talks to form the next government, as well as the Greens, was “the easy part,” the experts said.
“Strong political leadership will be crucial to implement a growth-oriented spending policy, an improvement in the quality of the business location and structural reforms that are appropriate for demographic change,” the IW authors write.
Source: dpa