Cost of living: Germany seeks to defuse social ‘time bomb’

Olaf Scholz is gathering leaders of trade unions and business associations at the chancellery on Monday to begin what officials call a “concerted action” to get Germany’s spiraling cost-of-living crisis under control.

Exacerbated by Russia’s strategic strangling of EU gas supplies, inflation has risen to 7.6% in June, with politicians and senior officials already warning that energy would need to be conserved before the colder season begins in autumn.

“Citizens need to get by in their lives,” Scholz said in an interview with the 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.” He called the situation a “social tinderbox.”

Chancellor Olaf Scholz is seeking concerted action on inflation

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 to consumers.

Such one-off government payments, especially for heating bills, have been floated in the past week by members of his center-left Social Democratic Party (SPD). But the coalition 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. “Only higher wages and social benefits will compensate the damage for people on middle or low incomes,” he told the DPA news agency. “One-off payments are not targeted, because a lot of people don’t profit from them at all.”

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 gave interviews on Monday morning saying wages needed to keep pace with inflation.

The ‘Tafel’ ngo that hands out free food to the needy, has seen a dramatic rise in demand

But few expect early breakthroughs in the talks. A government spokesman tried to manage expectations about the meeting: 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.”

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. “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.

Veronika Grimm, a member of Germany’s five-strong Council of Economic Experts that evaluates government economic policy, said tax relief was more likely to benefit higher-income earners, but that people on social benefits were most affected by high energy costs.

Different plans

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.

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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