Commentary on Political Economy

Thursday 31 March 2022


The German economic miracle no longer exists

By Ambrose Evans-Pritchard

Germany is facing a poisonous combination of rising recession risk and the highest inflation for half a century, even if it can avoid the full macroeconomic shock of a Russian energy blockade.

The headline HICP inflation rate spiked to 7.6 per cent in March, well above expectations and a figure unseen since the “stagflation” crisis of the early 1970s.

It follows the steepest one-month fall recorded in the expectations component of the Ifo confidence index.

The manufacturing and broader sentiment indicators are now weaker than they were during the eurozone debt crisis, and not far short of the extreme capitulation levels of the global financial crisis in 2008.

The mood is likely to deteriorate further as the coalition government prepares contingency plans for energy rationing across swathes of industry.

Those plans will be activated if Russia persists with its demand for payment in roubles for fossil fuels - a ruse to force foreign banks to interact with the Russian central bank and therefore erode the sanctions regime.

The German Council of Economic Experts has already cut its growth forecast for this year from 4.6 per cent to 1.8 per cent. It has since started to flag the dangers of a deep and lasting recession.

“It could get a lot worse,” said Professor Volker Weiland, one of the five “wise men”.

Professor Wieland said inflation could spiral into double digits and warned that the latest shock will be harder to handle than the pandemic, when the authorities could at least unleash unlimited monetary and fiscal firepower to stabilise the economy.

This time stimulus risks entrenching the inflationary dynamic and proving counter-productive.

“The European Central Bank will have to raise interest rates. It has no choice: we’re seeing a surge in inflationary expectations,” he told Handelsblatt.

It is a surreal situation. The ECB is still conducting quantitative easing and holding rates at an historic low of minus 0.5 per cent, severely damaging the business model of the German savings and cooperative banks.

These provide 90 per cent of total credit to the Mittelstand family firms, once the bedrock of the German Wirtschaftwunder, but are now under mounting stress.

The nightmare scenario for German conservatives is unfolding before their eyes.

“The euro has become the successor of the Italian lira, not the successor to the Deutschmark, just as we feared,” said Professor Thomas Mayer, Deutsche Bank’s former chief economist and author of Inflationsgespenst (The Ghost of Inflation).

“We were seeing echoes of the 1970s even before the war in Ukraine started. The ECB has been using models that do not work and has forgotten about the money supply: the Keynesian paradigm rules supreme,” he added.

The longer this protracted crisis continues, the more it starts to look like a depression, with lasting structural and hysteresis. The last window is slowly closing before the country’s demographic decline starts in earnest.

“It has succumbed to pure fiscal dominance just like the Banca d’Italia in the 1970s when it was obliged to buy Italian government bonds.

Southern Europe is now so deeply indebted - including France - that the ECB cannot raise rates. It is completely boxed in. Of course, everybody will blame Putin and claim that none of this could have been foreseen,” Professor Mayer said.

Otmar Issing, the ECB’s founding chief economist and a towering figure in German economic circles, said the central bank had betrayed its stability mandate and must now bite the bullet before it is too late.

“The war is no excuse to delay the exit from massive bond purchases. The ECB is going to pay the price for not heeding countless warnings and halting its ultra-expansive monetary policy long ago,” he said.

Evercore ISI said the ECB may have to navigate the reefs by tightening into an economic slowdown while at the same time creating a “spread protection instrument” to protect Club Med, which some might call a euphemism for an illegal monetary bailout of insolvent states.

The German Macroeconomic Policy Institute warned this week that the war in Ukraine has caused the recovery to stall, with risk of an unpredictable “cascade effect” through supply chains and financial channels.

A full cut-off of Russian coal, gas, and oil could slash growth by 6 per cent of GDP, leading to a deep recession.

Germany has yet to recover from post-COVID supply disruptions, especially the shortage of semiconductor chips used in the car industry. It is now suffering a second hit from Ukraine, a manufacturing source of car components and as well as neon gas needed for chip production.

Unlike France and the UK, Germany has not yet recovered its pre-pandemic levels of GDP.

The longer this protracted crisis continues, the more it starts to look like a depression, with lasting structural and hysteresis. The last window is slowly closing before the country’s demographic decline starts in earnest.

The huge differential in gas and energy prices between the US and Germany is hollowing out German industrial plants.

Chemical, fertiliser, steel, and metallurgy companies are either shifting output to US-based plants or losing global market share altogether.

The strains are getting worse at a time when the German car industry itself is grappling with the existential threat of electric vehicles, which it neglected for too long.

Professor Wieland said the debate in Berlin over whether a Russian energy embargo would be costly misses the greater point. Germany has no choice: it is already in conflict with Russia.

“You have to assume that Vladimir Putin will precipitate a supply freeze when it inflicts the most harm and is most advantageous for him. Ergo, we must put all levers in motion now to prepare for it,” he said

The Russian journalists fighting to cut through the state-sponsored noise

A group of independent Russian reporters are in Ukraine and attempting to break the Kremlin’s stranglehold on information

Oksana Baulina

For years, Oksana Baulina did her best to stand up to Vladimir Putin’s system in Russia, and was eventually forced to flee the country. Last week, she was killed by a Russian missile, soon after arriving in Kyiv to report on Vladimir Putin’s invasion.

The death of Baulina, a former associate of opposition politician Alexei Navalny who was working for the Russian news outlet The Insider, has put the spotlight on the tiny group of independent Russian journalists now inside Ukraine.

In their work, they are attempting to break through the Kremlin’s stranglehold on information about events in the country, which official Russian media insists on calling a “special operation” to liberate Ukraine from “Nazis”.

Colleagues paid tribute to Baulina as a passionate and fierce reporter, who had given up a life working in glossy magazines to stand up for what she believed in.

“I met her a few days before her death, I was probably the only person from her previous life that she met here, and she was explaining in great detail her plans, she was just so enthusiastic and really wanting to do the reporting,” said Peter Verzilov, an activist and journalist who is the publisher of news site Mediazona, in an interview in Lviv.

Mediazona, like many Russian-language news outlets, was blocked by the Russian internet watchdog in the early days of the war for not adhering to wartime censorship rules that ban any information that could “discredit” Russia’s army.

“Despite the block, during the last month our readership numbers went up almost twice, to about 3.5 million unique visitors this month,” said Verzilov.

Nevertheless, Verzilov said it was clear that Russian state messaging was working on a large number of Russians, pointing to the numerous stories of Ukrainians contacting friends or relatives in Russia and being told they were imagining the things they could see with their own eyes.

“When your own son is telling you, ‘Dad, do not believe the fucking television, it’s not true,’ and you say ‘No, no, Nazis are just brainwashing you,’ it does show that Russian propaganda is amazingly effective for certain portions of the population. It really does work, when you’re switching between channels and all of them have the same content,” said Verzilov.

Other journalists agreed that cutting through the state-sponsored noise was getting ever harder. Last weekend, Ukrainian president Volodymyr Zelenskiy gave an interview to several independent Russian outlets, and Russian authorities immediately announced any site that published it could face criminal responsibility.

“The people who say, there’s plenty of information on the internet, they just don’t understand what they’re talking about. My twin sister asked me how to watch Zelenskiy, she just had no idea how to find it,” said Yevgenia Albats, a veteran Russian journalist who edits the New Times website.

Albats said 741 websites have been shut down in Russia since the beginning of the war, and said the effect was hard to overstate. The New Times was blocked on the second day of the war. Albats is still updating the website using a VPN, though four of her employees have left the country.

“Basically, it’s a total evaporation of any alternative news or opinions in the Russian language media sphere. Total destruction. Annihilation of any alternative views and opinions.”

A singular exception has been the reporting filed from Ukraine by Elena Kostyuchenko, a resourceful and fearless reporter for Russia’s Novaya Gazeta, whose editor-in-chief Dmitry Muratov won the Nobel prize last year.

Kostyuchenko was initially turned away from the border when she tried to cross from Poland on the first day of the war, but was let in after the editorial board made some phone calls. Since then, she has been in southern Ukraine. She has filed moving reports from Mykolaiv, which has been under intense Russian attack, and Kherson, currently occupied by Russian troops.

“Every day, I see the crimes my country is committing. Every day I see injured people, dead people, destroyed houses, I spoke in Kherson with people who lived through kidnappings,” she said, in a telephone interview from Mykolaiv.

“It’s morally difficult, but I think it would have been morally more difficult to sit in Moscow and follow it on internet,” she said.

Once inside Ukraine, Kostyuchenko said she did not have problems working with a Russian passport, once she had explained she was from Novaya Gazeta.

“The majority of people understand why I’m here, support what I’m doing and support me hugely,” she said.

Novaya Gazeta took the decision to follow Russian censorship laws, not using the word “war” or “occupation” but instead leaving blank spaces where the forbidden sections would go.

Kostyuchenko said she wrote her texts without censorship and they were then redacted by editors in consultations with lawyers.

“If the law was formulated to only put journalists in prison, inside the office we would publish everything, but the law is formulated so all the people associated with the text: proofreaders, internet managers and the accountants, could be responsible,” said Kostyuchenko.

“We had a meeting inside the editorial board. We had two options: close or to continue working in the regime of military censorship. More than 90% of readers voted for us to keep on working,” she said.

This did not save the publication, however, and earlier this week Muratov announced that Novaya would be closing until the end of the “special operation” in Ukraine.

Many independent journalists have left Russia altogether, in fear of being jailed under the new laws. Albats said she had no plans to leave Moscow, but was “crying every day” over what had become of Russia, and the fact her country was waging a war of conquest.

“We are destroying another country and killing people. And this is unbearable. I understand that what I’m doing is basically almost useless. I do this because otherwise I’m going to hang myself,” she said.