Lidia Conde | Veronika Grimm (Rendsburg, Germany, 1971) sits on the German Federal Government’s Advisory Council of Economists, which analyses the country’s economic development on the basis of scientific criteria and publishes a report every autumn in which it expresses its analyses and forecasts. Following its opinion, the government in turn responds to the council’s recommendations. Now, Grimm predicts that the economy of the continent’s leading power will shrink by 0.2 per cent in 2023, a figure that is less pessimistic than that of the government, which recently predicted a 0.4 per cent decline.
Q: All indications are that recession and inflation in 2023 will not be as severe as predicted so far. What are the Council’s forecasts for 2023?
The Russian attack on Ukraine has dealt a considerable blow to the economic situation in the European Union and, above all, to the German economy. High energy prices and the risk of a gas deficit are a heavy burden for this country… In the autumn our Advisory Council corrected its spring forecast for 2023. It went from forecasting growth of 3.6 per cent to a fall of 0.2 per cent. High inflation strangles both businesses and households and has a detrimental effect on the distribution of wealth. We forecast inflation of 7.4% for Germany in 2023. But we assume that inflation will come down considerably in 2024, provided that the ECB continues its tight monetary policy. On the other hand, high fossil energy prices, especially gas prices, will increase the pressure to implement the green transformation, the energy transition, in Germany. In any case, this is an immense challenge. [In spring the Council had drastically revised downwards their economic growth forecasts for Germany in 2022 and 2023. From 4.6% to 1.8% in 2022. Now they forecast a 0.2% drop in 2023].
Q: However, Germany is still going strong; hence the question of whether Germany will remain strong for Europe…
Cooperation and the European Union are the key to overcoming the current challenges and are also fundamental in many respects. First of all, European countries must succeed in breaking their dependence on Russian gas. It is about buying gas together for everyone, but also about saving energy. The German economy has managed to reduce its gas consumption by 20% without a corresponding loss of value creation. Far from it.
Q: How important is Europe for Germany in the current global geopolitical constellation?
It is of decisive importance. Our greatest European challenge is to position ourselves together in a new international order guided by new power strategies. The aim is to reduce economic dependencies together, for example, dependence on China, and to have a new energy supply structure. We must closely link energy, climate, and trade policies with the European security strategy. We have neglected this in the European Union.
Q: But on the other hand, German companies do not want their business interests in China to suffer. Will Germany be able to distance itself from China – by diversifying its suppliers and customers – without damaging economic relations between the two countries?
Both the European Commission’s analyses and our research at the Federal Government’s Advisory Council of Economists show that a large proportion of the imported products that are considered highly dependent – i.e. cannot be replaced by products from other countries or can hardly be replaced at all – come from China. These are mainly technology products or products in the health sector. Through the Important Projects of Common European Interest programme, the EU is already trying to reduce these dependencies and to stimulate its own production of systemically relevant products. These include products in the fields of microelectronics, European cloud infrastructure – an essential pillar for economic digitalisation – battery cell manufacturing and, more recently, hydrogen technologies.
Q: How do you see the dilemma of the ECB fighting inflation without wanting to strangle economic growth while states are borrowing to support the population?
It is clear that the state must help those who are unable to withstand the crisis on their own. But the support measures must be managed precisely, targeting low and middle-income households and doing so without losing sight of the fact that it is also a matter of encouraging energy saving. This has not always been achieved in Germany. One example is the discount on petrol and diesel, which benefited most those who consume the most, the high-income population, and stimulated fuel consumption. Another challenge is assistance to gas customers. Half of Germany’s 40 million households heat their homes with gas. Gas prices have increased six- to eight-fold compared to before. On the other hand, the price of heating oil has only doubled. That is why it was necessary to support gas customers. When the gas price brake was conceived, three criteria were considered: that it would relieve gas households, leaving the price at only double what it was before – incidentally, it is estimated that this will be the price of gas in the future – that it would encourage energy saving, and that it would be implemented quickly and without bureaucratic problems. And it has been achieved. The solution has been for households to receive a one-off payment. Consumers pay 80% of their usual consumption at only 12 cents per kWh (the historical price was 7 cents); the rest at the market price. This means that households that consume less save money. The price of gas will probably fall in Europe in the course of 2024, but it will remain twice as high as before for some time. This is a heavy burden, especially for energy-intensive companies. These companies face higher costs in their transformation to climate neutrality. Gas represents for many of them the bridge technology on their way to hydrogen-based industrial production. This is the case for production in the steel, paper, glass and chemical sectors. On the other hand, the high costs of fossil energies represent a stimulus to accelerate the transformation towards renewable energies, which are becoming increasingly attractive, both in electrification and in the hydrogen economy. Industry would benefit from an increase in hydrogen imports.
Another consequence will be the relocation of production. In the future, for example, green ammonia, produced in a renewable and carbon-neutral, climate-neutral way from renewable hydrogen technology, will be imported. Steel production will be restructured in Germany and produced with renewable hydrogen. On the other hand, in view of the US Inflation Reduction Acts, Europe will have to implement the green transformation as soon as possible and invest in the necessary infrastructure. Especially as US subsidies will attract production, for example of electrolysis plants that would be lacking in Europe. [The US Inflation Reduction Acts are, in the EU’s own view, detrimental to the European economy because they include a package of state aid for green transformation and climate protection.]