It sounds absurd at first, maybe even cold-hearted, but unfortunately it is the right way: The finance ministers of the 27 EU member states want to hold back this time. Huge economic stimulus and aid packages like the ones launched at the beginning of the pandemic should not exist. The Federal Republic and the entire EU are deep in crisis. Citizens and businesses are suffering from the high energy prices, and many economists expect German economic output to shrink. The finance minister at the time, Olaf Scholz, called these Covid crisis programs a “bazooka” and that Germany should turn the corner with a “boom”. Now, on the other hand, the Panzerfaust should stay in the gun cabinet.
This pledge by the ministers does not mean that politicians are underestimating the consequences of inflation and the energy crisis for consumers and companies. But they know that the fiscal bazooka would be the wrong weapon. Using them would do more harm than good. Because in times of high inflation, state aid must be as targeted and modest as possible. Citizens must therefore accept that the government cannot even come close to making up for their lost purchasing power and wealth. The decisive question is whether the 27 finance ministers will stick to this difficult course. After all, there is enormous political pressure to support the population across the board.
Many of the EU governments’ aid programs are already poorly targeted, and this also applies to the federal government’s relief packages. Not only those in need benefit from these measures, but even higher earners. And in two weeks, a coalition of conservatives, populists and the far-right could take power in Italy, the EU’s third-largest economy. The alliance attracts attention with expensive election promises, which is why there is a risk that the future finance minister in Rome will not believe in restraint.
But seeming generosity would only fuel inflation and delay a return to stable prices. The high energy prices mean that significantly more of the income of EU citizens ends up in the pockets of oil and gas suppliers outside Europe. Accordingly, consumers can spend less on purchases and services. Their purchasing power has dropped drastically. This is not only painful for citizens, but also for restaurant and shop owners who have to deal with less demand.
Normally, aid programs would be the means of choice, but inflation is too high
Governments can mitigate this slump in demand by increasing purchasing power. Tax cuts or a price cap for energy, financed with massive subsidies, could relieve the burden on the general public. Normally, such stimulus is just the right policy in a downturn. But this is not the case when inflation is so high at the same time. Even the core inflation rate, which excludes energy prices, has exceeded 5 percent. And the longer inflation reigns, the more difficult it becomes to get rid of it. If the state supports demand with aid programs, it complicates the European Central Bank’s fight against inflation. After all, more demand means higher prices, especially when supply is limited – for example, because supply chain problems make it difficult to produce some goods.
Therefore, broad-based relief programs are out of the question. At the same time, it is clear that governments must provide targeted support for low-income earners. No citizen should be forced to do without heating or light due to lack of money. Measured aid is also needed for companies whose existence is threatened by energy prices. The programs must be designed in such a way that there are still incentives to reduce consumption. Targeted aid also has the advantage over the bazooka approach of putting less strain on national budgets. This is all the more important because the Covid crisis has already inflated debt levels. If a country like Italy were to throw all discipline to the winds, the EU would face a new debt crisis in the middle of the energy crisis. You don’t want to imagine that.