French-style economic interventionism is rampant in Germany

Posted January 5, 2023, 4:52 p.mUpdated January 5, 2023, 5:01 p.m

In times of good decisions, the little economic music rising in Germany is likely to feed all hopes of a stronger-than-ever Franco-German partnership. Although he still has a liberal Finance Minister who adheres to economic state principles and respects market forces, Europe’s first engine is indeed seeing a more French-style interventionist camp grow.

The Institute for Macroeconomic and Economic Research (IMK), which is close to the trade union and green party of Economy and Climate Minister Robert Habakkuk, even presented a report on Thursday with the evocative title: “Cycle change requires proactive policies and a focused economy.” In this twenty-page document, the economists of the IMC believe that the EU should pursue a “more active industrial policy”.

Europe must set priorities

At the risk of getting into a trade dispute with the United States over the De-Inflation Act, Paris is out of the question of showing as much teeth as it wants. “It would not be in the interest of Europe and it would not solve the main problem that investors would prefer to build factories for the production of electric batteries in the United States,” warns IMC.

On the other hand, Europe should use this American attack to set its own priorities. “The initiative in this direction by Robert Habeck and his French colleague Bruno Le Maire is going in the right direction,” said Sebastian Dullien, scientific director of the IMK, which was made public last month. Paris and Berlin have asked the European Commission to relax rules on state aid to companies and “targeted subsidies” for strategic sectors.

Among them, Sebastian Dullien mentions the production of chips, electric batteries, pharmaceutical products, as well as steel, which is strategic for German industry. Michael Vassiliadis, head of the chemical trade union and close to the German chancellor, also recently spoke in favor of such incentives, denouncing Brussels’ “eternal mantra” about respecting competition.

Basic evolution

The IMF does not rule out the use of more debt to finance subsidies, but the institute prefers to emphasize more protective regulation, encouraging more production on European soil and climate. It also supports the principle of a carbon border tax adopted by the EU last month.

This development has been going on for several years now. But former Christian Democrat Economy Minister Peter Altmaier took a volley off the green when he spoke of his ambition to build the European champions in 2019. Massive American financial support for the green transformation of industry and the threat of stalling German industrial flagships have dampened criticism.

The ECB specifically noted

This change is accompanied by a second piece of music that sounds quite sweet to the ears of Southern Europe: the economists of the IMF criticize the rapid increase in interest rates of the European Central Bank, which they consider “excessive”. Sebastian Dullien, on the other hand, welcomes the expansionary budget policy of the German government, which he estimates has already mobilized around 185 billion euros to support households in 2022 and 2023.

A monetary policy that tightens the steering wheel too much may call into question the success of the crisis management implemented so far.

Sebastian Dullien, Scientific Director of IMK

The economist advocates compensating by taxing the highest households, as does the German Council of Elders. The economist adds that “monetary policy that tightens the reins too much may question the success of the crisis management implemented so far, but it may not achieve its goal.” In addition, the ECB is unlikely to act against rising energy prices, he said. And “there are no convincing signs in favor of consolidation of inflation with price-wage spirals in the euro area,” he concludes.

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