After two years of the pandemic, Germany was actually on a recovery course. At least that’s what the Ifo business climate index showed in February. However, the monthly survey of German companies came out on the day of the Russian invasion – and with the war, Germany faces new economic challenges.
Since then, food and energy prices have been rising. Calls for price reductions are getting stronger. “Especially from federal states where elections are coming up soon,” says Clemens Fuest at the Munich Economic Debates, a series of events organized by the Ifo Institute and the Süddeutsche Zeitung.
The economist doesn’t believe that a reduction in VAT on fuel will have the right effect: “The state cannot protect the population from high energy costs. You can only redistribute them among the population,” says Fuest. But that doesn’t mean that Fuest is in favor of expanding the welfare state. Rather, it is a question of a temporal redistribution: If the state lowers petrol taxes, private households will initially spend less on petrol. The state will go into debt for this – and it will have to recover the expenditure later through higher taxes or cuts in spending. It remains unclear, however, who has to pay for it.
Fuest uses a calculation example to show that a reduction in VAT for petrol prices is not effective. Suppose the price of fuel remains at 2.20 euros per liter. If the state went down five tax points, 2.10 euros would be due. “But that only applies if the producers pass the full tax cut on to the consumers. But they won’t do that,” says Fuest. An estimate by his colleagues at the Ifo Institute showed that producers will pass on at least 60 percent of the VAT reduction to customers. The remaining share remains with the mineral oil companies. With a tax cut, the price would actually only fall from 2.20 euros to 2.14 euros. In addition, higher earners in particular would benefit because they have and use cars more often.
Another proposal from the coalition is the mobility premium. It is being discussed whether households with a net income of up to 2000 euros should receive 50 euros from the state. According to Fuest, this is not a particularly targeted measure, but rather a nationwide aid. Because: In this income group, only half of the households own a car. Instead, support should be given to those who are actually suffering from the high fuel prices. According to Fuest, an increase in the long-distance commuter allowance would therefore be more appropriate.
Russia is also dependent
The Ukraine war raises a much more important question: Should Germany or Europe buy gas from Russia at all? One thing is clear: Germany and the EU are dependent on Russian energy imports. The EU gets a quarter of its oil from Russia, and Germany’s share is a third. The dependence is even greater for natural gas: 36 percent of the natural gas that flows into EU countries comes from Russia, and Germany even gets 55 percent from there.
But there is one point that, according to the economist, is often overlooked: Russia is just as dependent on the EU as it is on Russia. 53 percent of Russian oil exports go to Europe, 71 percent is natural gas. “If Europe stopped buying Russian gas, then Russia would have a problem,” he said.
Fuest considers it a geostrategic mistake to suspend trade with Russia even after the war has ended. “We wouldn’t have any dependencies, but we wouldn’t have any leverage either.” In the future, Germany should instead invest in parallel infrastructures, such as LNG terminals. The goal: Mutual dependency becomes one-sided to the detriment of Russia. Spreading the risk has its price. The energy supply is becoming more expensive – and the Germans would have to live with the fact that they would lose part of their prosperity.