The energy shock caused by Russia’s invasion of Ukraine has led to the biggest collapse in German living standards since the second world war and a downturn in economic output comparable to the 2008 financial crisis, a stark assessment has found.
In a joint paper designed to underline the depth of the economic crisis in Europe’s erstwhile powerhouse, two former economic advisers to the German government have said that real wages in the country slumped further in 2022 than in any year since 1950.
A failure to protect German industry from the energy price spike may turn the 2020s into “a lost decade for Germany” and further fuel the rise of the populist far-right Alternative für Deutschland (AfD), the authors warned in a working paper published by the Forum for a New Economy.
Isabella Weber, associate professor of economics at the University of Massachusetts, said: “In an age of conflict, climate and geopolitical crisis the rise of the AfD is a wake-up call. The collapse in living standards experienced by Germans is unprecedented since world war two. While it is true that the factors that fuelled the rise of the AfD go beyond economics, it is also impossible to ignore how this unprecedented slump in German living went hand-in-hand with the rising popularity of the far right.”
Weber served on a high-level expert commission that was charged by the German government with designing an energy price brake for firms and households in 2022. Her co-author, Prof Tom Krebs, was a senior adviser at the finance ministry under Olaf Scholz, now the German chancellor.
Their findings underline the extent to which Europe’s largest economy is still reeling from the February 2022 full-scale invasion of Ukraine. The International Monetary Fund forecast for German growth in 2024 and 2025 is that it will be lower than any comparable advanced economy save Argentina.
The economy shrank by 0.3% in the final three months of 2023 and is expected to contract again in the first quarter of 2024. Two consecutive quarters of falling output are defined as a technical recession.
Weber and Krebs highlighted that two distinct surges in support for the AfD in the summers of 2022 and 2023 coincide with periods of uncertainty in the German government about how to address the impact of energy price shocks on living standards.
They calculated that real wages measured against pre-crisis forecasts fell by 4% from April 2022 to March 2023, while output fell by 4.1%. Once the damage to output caused by the Covid crisis is included, actual output at the end of 2023 was about 7% below the pre-crisis trend. Real wages were 10% below their pre-crisis trend in 2023.
The economists argued that the energy price brake, introduced by Scholz’s coalition government later in 2022, was the right policy response, but that the delay in implementing it, at a time when the market price for gas was skyrocketing, led to a strong increase in AfD approval in the summer after the Russian invasion.
