Inflation, Bankruptcies and Fears of Decline – Germany on the Brink

Illustration: SAMSON / DER SPIEGEL

Inflation, Bankruptcies and Fears of DeclineGermany on the Brink

Inflation, a likely recession and exploding energy prices: Germany is expecting tough years ahead with diminishing prosperity, a shrinking middle class and growing inequality. This is uncharted territory for the government and society, and both are facing some difficult choices.

Nicole Geithner’s family ought to be doing well. Really well. And the Geithners know it. Their apartment, in a historical building located near Dresden, is freshly renovated, her job as a paramedic and his as a project manager for an IT company are decently paid and secure. With a gross household income of 90,000 euros, they are firmly anchored in the middle class. They should be living pleasant lives.

But it doesn’t feel that way for the family of four. They long ago gave up their dream of owning a home, with their plan of buying a second car meeting the same fate. The trip they planned to take to Amsterdam has also been cancelled. Moreover, the Geithners have begun paying closer attention to sales and special offers at the supermarket. “I’m afraid that soon we won’t be able to afford the nice life we live,” says Nicole Geithner, 35. “We’re nervous.”

The article you are reading originally appeared in German in issue 38/2022 (September 17th, 2022) of DER SPIEGEL.SPIEGEL International

They’re not alone. Political leaders in Berlin are also growing uncomfortable. When the German middle class starts worrying about decline, things start getting dicey everywhere in the country. Particularly for the government.

One doesn’t have to look far for the roots of the problem: high inflation, skyrocketing energy prices and a slowing economy. Not to mention the challenges associated with tackling climate change.

And the situation wouldn’t even improve particularly quickly if the war in Ukraine were to come to a sudden, unexpected end. On the contrary. Several different crises are coming together at the moment to form a perfect storm.

That the German economy will slide into recession this winter is no longer really a question. And there is growing evidence that it could become particularly severe – with a tenfold increase in the exchange electricity price, numerous corporate bankruptcies and a permanently damaged economy. The losses in prosperity, says economist Michael Fratzscher, will be permanent. Germany, according to the forecasts, is in decline.

Nicole Geithner’s family has increased their grocery budget by 20 percent, and their prepayments on water and general utilities for their apartment have doubled. She suspects that this is by no means the end of the story. “There’s always something on top,” Geithner says. To Geithner, it feels “like we’ve completely lost control.”

This is uncharted territory for Germany. After nearly two golden decades of rising incomes, steady economic growth and little unemployment, a tough decade is looming. At least for those who aren’t happy about paying up to 1,000 euros more a month for gas and electricity, three euros for butter and purchase prices of 1 million euros for a two-bedroom apartment. In other words, everyone but the top 10 percent of the country.

At the same time, that which has been glossed over in recent years is now coming to the fore: Growing inequality. Since the 1990s, incomes have been drifting apart, and wealth even more so. The wealthy own more and more, even as the number of low-income earners is growing. The center of society is fraying.

In good years, this could be ignored politically, because it was mainly the bottom 20 percent who suffered. As harsh as it may sound, it is a demographic that traditionally hasn’t had much of a say in the country. Today, though, it’s also about the center of society, even comparatively well-off people like the Geithners.

Just how dramatic the situation is can be seen from one of the Germans’ favorite activities: saving money. The Sparkassenverband savings banks association estimates that 60 percent of households in Germany soon will no longer be able to put money aside. Inflation and energy prices are eating up their disposable income. During the second quarter of this year, real wages fell by 4.4 percent.

A middle class family: Nicole Geithner, her partner Valentin Schulze and son Emilian

A middle class family: Nicole Geithner, her partner Valentin Schulze and son Emilian Foto: Sven Döring / laif

Among the hardest hit are the up to 14 million people who are just barely clinging to the middle class and don’t want to slip any further. Families with two children and a net income of 3,000 euros per month, for example, who have had to stretch their budgets to the limit despite two full-time jobs. People, in other words, who already have their doubts about social justice in the country.

It’s a dangerous situation, and not just from an economic point of view. Thousands have taken to the streets in protest in the cities of Leipzig, Magdeburg and Pforzheim in recent weeks, and it’s possible this is only the beginning. Politicians in all camps are warning of the possibility of a “hot autumn,” some of a winter of rage, referring to possible protests and unrest. Germany’s domestic intelligence agency, the Federal Office for the Protection of the Constitution, which is tasked with monitoring extremism, has set up a working group to investigate if a movement is materializing.

The fears are justified. People who feel left behind tend to gravitate toward the political fringes. Injustice, even if only a perceived unfairness, fosters populism and extremism.

The federal government is turning to its usual practice of trying to smother the problems with money and is working on its third relief package within just a few months, this time with the aim of calming the lower middle class. The plan calls for things like a flat-rate energy price for pensioners, a flat-rate national public transportation ticket (for somewhere between 49 and 69 euros a month) and increased monthly child benefit payments for parents.

But much of it still seems half-baked. It remains an open question, for example, how exactly an electricity price cap is to be financed by skimming profits from energy utility companies. Despite the “massive” relief package, as the finance minister calls it, Chancellor Olaf Scholz is still failing to come up with a clear plan for combating the downward spiral.

Still, Germany’s leaders are at least aware that quickly fabricated cash gifts to calm the masses are not a sustainable solution in the constant fire of crises around the world. There simply isn’t enough money available given the large number of problems and increasingly precarious situation.

The prevailing world order is disintegrating, the age of globalization is coming to an end, and the German model of prosperity in particular is under massive threat as a result. The consequence is that there will be less to redistribute in the future.

At the same time, the government and taxpayers will be faced with hundreds of billions of euros in additional costs over the next several years. Industry must be transformed to become climate-neutral, and the country’s energy supply must be shored up to ensure independence from Russia. The country must be reformed, digitized and made more competitive for the increasingly tough systemic competition against autocracies like China. Traditional industries are in danger of disappearing – and with them jobs.

A luxury perfume ad: People at the bottom have fewer opportunities to work their way up. "To exaggerate just a bit: once poor, always poor – once rich, always rich."

A luxury perfume ad: People at the bottom have fewer opportunities to work their way up. “To exaggerate just a bit: once poor, always poor – once rich, always rich.” Foto: Stefan Boness / DER SPIEGEL

The crisis is also a symptom indicating that a chaotic epoch is dawning. That many things aren’t just changing for the foreseeable future. Rather, they are structural changes, and likely for the worse.

As such, it will be necessary to renegotiate how this will affect society – who will have to give up more and who will get how much? What fairness will mean in concrete terms in the future.

Is this the beginning of a decade of redistribution that will primarily burden the upper middle class, a group that benefited the most when times were good? Or will people have to get used to the fact that the state can no longer relieve them of every burden? And how much strength and money will then be left for reforms that have long been agreed upon, so that the coming generations won’t be handed an emaciated country, but rather a modern and climate-friendly one?

These are difficult questions that could become a test for society. And even more so for a governing coalition that has highly divergent views on the definition of fairness.

I. Is Chancellor Olaf Scholz Up to the Crisis?

You can tell that nerves are frayed when the chancellor gets loud, when he almost yells. These are “serious times,” Scholz shouted in the federal parliament, the Bundestag, last week, actually clenching his fists. The cohesion of society, he said, is “of the utmost importance.” The chancellor has cultivated a standard appearance over a long period of time: cool, unemotional and stoic. When he deviates, as he did this time, it is a special moment, one that points to political unrest.

During that plenary debate in the Bundestag last week, Scholz spoke of a “division” in the country, of peace that is endangered. He even recited lyrics from the club anthem of the English football club Liverpool FC, “You’ll Never Walk Alone,” and proclaimed it to be the “motto of this government.”

Government coalition partners, from left to right: Robert Habeck of the Greens, Olaf Scholz of the Social Democrats and Christian Lindner of the Free Democrats

Government coalition partners, from left to right: Robert Habeck of the Greens, Olaf Scholz of the Social Democrats and Christian Lindner of the Free Democrats Foto: 

Despite these assurances, though, many people seem convinced that they will have to deal with this crisis largely on their own. They have seen how many billions of euros the government is pumping into relief and also how quickly it has evaporated. How long can the government continue to offset the costs, especially with a finance minister from the junior coalition partners, the business-friendly Free Democrats (FDP), who has made Germany’s balanced-budget law, the “debt brake,” his mantra?

Although the German government has now approved around 95 billion euros in aid, 60 percent of Germans feel that the relief packages are not socially just, according to a survey conducted by pollster Civey on behalf of DER SPIEGEL. And almost three-quarters of Germans fear that they will be worse off economically in the long term. There is little sign of solidarity, of any broad sense of fairness.

Some in Berlin are watching this eroding confidence in social cohesion with growing concern. It helps explain why the chancellor expects less from one-off payments like those in the current package to students and pensioners. He has higher hopes for the effects of structural change: the recent reform of the country’s system of payments for people on long-term welfare or by raising the income threshold from which people must make contributions to the social welfare system. It was his idea to allow employers to provide a one-time payment of up to 3,000 euros without any payroll taxes to employees to help relieve the burden of higher energy costs, for example.

These times of crisis, in which redistribution, social fairness and solidarity are so important, should actually suit a chancellor with the center-left Social Democratic Party (SPD). One might think he would experience a political boost. But the opposite is the case: For weeks, Scholz’s popularity ratings have been falling. According to a poll by Civey, almost 50 percent of respondents said they were “very dissatisfied” with the chancellor’s work – even after the passage of the latest 65-billion-euro package.

Scholz won his election campaign based on promoting more societal fairness. Those close to him often relate anecdotes of Scholz addressing stagehands, drivers and security staff at big events. Hard-working people, say his confidants, are a primary focus of his.

This can also be seen in the coalition agreement, in which he pushed through one of his most important promises: an increase in the national minimum wage to 12 euros starting Oct. 1. This is a “political revolution,” says the SPD. It’s just that few have really noticed it. On the one hand, Economy Minister Robert Habeck’s star has been shining a little too brightly compared to the more aloof Scholz – at least until Habeck got tangled up in Germany’s approach to the energy crisis, natural gas prices and nuclear energy. The chancellor’s bigger problem, though, is that few citizens seem to believe that the current government led by Scholz will really help them, despite all the relief packages.

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