Lindner’s top consultant Lars Feld: “The danger of a wage-price spiral is great”

Lindner’s top consultant Lars Feld: “The danger of a wage-price spiral is great”

BFederal Finance Minister Christian Lindner has appointed top economist Lars Feld as his personal special representative. The former chairman of the five economic wise men can gain enormous influence as a chief advisor. And with inflation, record EU debt and the expensive transformation of the economy towards climate neutrality, there are plenty of major construction sites.

WORLD: Professor Feld, Federal Finance Minister Christian Lindner has appointed you his personal special representative. How is this newly created role to be understood?

Lars Feld: This new office is not about pure regulatory doctrine. Politics is the art of compromise. However, one must not lose the regulatory line. But I remain independent and will continue to not be silent when things go in the wrong direction.

WORLD: One of the great concerns of Germans is high inflation. Right?

Field: Hardly anyone had expected such a sharp rise in inflation. And I would be careful to only speak of a short-term flare-up in inflation. After all, the new President of the Bundesbank, Joachim Nagel, assumes four percent for this year. The trade unions will raise their wage demands accordingly. The danger of a wage-price spiral is therefore great.

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WORLD: Does the federal government have to react?

Field: In the event of inflation, the European Central Bank is called upon. Clear signals are needed here that prepare for the imminent end of bond purchases and interest rate hikes. However, the federal government can certainly contribute to stabilizing prices. On the one hand, a good foreign policy helps. Because crises like the current Russia-Ukraine conflict are also driving up energy prices. Every geopolitical relaxation brings relief. In view of the high energy costs, it makes sense to bring forward the planned abolition of the EEG surcharge, because the electricity providers will pass the savings on to their customers.

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WORLD: Is that enough in view of the enormous increase in energy prices? A higher commuter allowance and tax relief for electricity and heating are also required.

Field: The electricity tax, which brings in 6.5 billion euros, could indeed be significantly reduced. Together with the EEG surcharge, the relief effect would be significant. On the other hand, I do not believe in renewed exemptions from VAT. Just like an increase in the commuter allowance, this would also require a majority in the Federal Council, which is not in sight.

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WORLD: The traffic light coalition is planning a super write-off for climate protection and digital assets as the most important tax relief for companies. Should she come quickly and best for all investments?

Field: This instrument for the transformation of the economy is important and must be implemented carefully. This requires good negotiations with the federal states, because the federal government cannot fully compensate for the tax shortfalls. Limiting the measure to climate protection and digitization makes sense, because otherwise the super write-off would be very expensive.

WORLD: The traffic light skimps on tax cuts, but promises and grants the economy massive subsidies in order to accelerate the transformation to climate neutrality. Is a subsidy race looming?

Field: In order to achieve the climate protection goals, the measures must be efficient. Clever CO₂ pricing is crucial for this. We must also ensure that we take our European partners and other countries with us on this path. Under no circumstances should we launch a new wave of subsidies, also with a view to finances. Because it would be wrong to feed the steel industry with subsidies on a permanent basis. The fight for such aid is fierce. You have to counter that.

WORLD: Like the previous government, the traffic light is very active in terms of industrial policy: whether battery cells, microchips, electric cars or the hydrogen strategy – billions are flowing everywhere. That doesn’t sound like a slim state.

Field: In fact, it doesn’t make sense to just throw money at the industry. I remain skeptical about state subsidies for battery cell production or e-mobility. The EU project for a European microchip industry is also problematic if it does not make it internationally competitive. The call for greater independence from international supply chains carries the risk of even greater protectionism. The case is different with the national hydrogen strategy. In order for hydrogen to be usable in the energy transition, technical progress must be accelerated. That is why state funding rightly starts here with research and development. This type of industrial policy can actually strengthen the business location in the long term.

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WORLD: At the European level, the Federal Minister of Finance has a delicate mission ahead of him. The skyrocketing EU debt has fueled the debate about easing Europe’s debt rules. Lindner was surprisingly flexible recently.

Field: It’s reasonable to be able to talk and negotiate. At European level, it is important to search for solutions pragmatically. Within the euro zone there are a number of mainly smaller member states that easily comply with the maximum debt level of 60 percent of gross domestic product. Another group – which also includes Germany – is sometimes above that, but then pushes the debt level back towards the 60 percent mark. Together, these two groups form the vast majority. Only six – or seven with Cyprus – countries have significantly higher debt levels.

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WORLD: The latter, led by France and Italy, seem to be more assertive.

Field: The heavily indebted countries cannot simply introduce a bill raising the limit to 100 percent and all other countries must follow. This would in any case require a change in the EU treaties, which is not realistic because of the necessary unanimity. States that push for more flexibility must offer something in return. It is clear that the national debt levels will have to be reduced again over time, as Lindner emphasized. Italy in particular could be given more time than previously provided for under the rules.

WORLD: In the Greek crisis, Germany was regarded as the disciplinarian in Europe. Today, this role is left to countries such as Austria or the Netherlands, which together with Denmark and Sweden form the “Frugal Four”. a mistake?

Field: A disciplinarian is useless. The frugals are now less sharp as well. It is true, however, that Germany has to come up with a clear line again. As soon as the corona crisis is behind us, it is a matter of adjusting and, above all, enforcing the rules in such a way that in good times things are really consolidated and debts are reduced again. But it would be wrong to take significant consolidation steps now, when the upswing is still fragile.

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WORLD: High inflation and record debts – is the euro debt crisis threatening to return?

Field: I don’t see a new debt crisis looming at the moment. Calculations presented by the German Council of Economic Experts last year show that the German state budget would not have any problems even if interest rates rose to three percent. Even highly indebted Italy would only feel the financial consequences relatively late, since the loans are very long-term. So investors don’t have to worry about their money. In addition, Italy’s Prime Minister Mario Draghi is trying to implement real structural reforms in his country in order to strengthen growth in the long term. That gives hope.

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