It is not good policy to support citizens in flying to the Caribbean

Achim Wambach is warning the government against introducing a kerosene discount following the discount on petrol. 

Professor Wambach, the German economy is stuck in a rut. A good ten thousand industrial jobs are being lost every month. What are the causes of this gloomy economic situation?

ACHIM WAMBACH: Germany has now gone three years without any noticeable economic growth. Our economy is constantly facing new crises. However, the root cause is a structural crisis, not a cyclical one. The federal government has now realised that urgent action is needed. And it is taking measures, as demonstrated by the decision on health care reform, which will save billions. This is a step in the right direction, unlike the decisions taken in the early days of the coalition government.


What were those decisions?

WAMBACH: The coalition made mistakes in a situation of absent economic growth: The VAT reduction in the hospitality sector and spending additional money on the expansion of the mothers’ pension meant that revenue was foregone, without these measures having any effect on productivity. This created the impression in the business community that this government is unwilling to tackle genuine structural reforms. But now it is clear: The representatives of the coalition have heard the message from the business community. 


You sound confident.

WAMBACH: In principle, I am confident, if only because the pressure on the coalition is enormous. But one thing is also certain: The government has not yet delivered. The health care reform agreed by the coalition has yet to become law. Recently, there has been much dispute within the coalition. However, we can no longer afford to postpone reforms, whether they concern health care, care, pensions or taxation.


Why is there such immense pressure? 

WAMBACH: Because companies are no longer investing in Germany due to the unfavourable conditions for businesses. More foreign companies are investing in France, for example, than in Germany. This used to be different and should change again. The black-red coalition government now has a mandate to tackle major reforms in Germany. After all, this government represents the middle part of society. If this coalition fails to seize this opportunity, that will hit Germany hard.


In other words: This government has no choice but to embark on far-reaching reforms?

WAMBACH: The coalition needs to respond to a threatening situation: If companies stop investing in our country, our economic foundations will erode. The state of our country’s economy in five years’ time will be decided now. Investments have a long-term impact. But they need to come now.


Many industrial firms are currently turning away and prefer to invest in Eastern Europe.

WAMBACH: During a trip through Eastern Europe, I noticed that people were astonished that Germany is doing so badly economically, when things are going well in their own countries. In a cyclical crisis, when Germany suffers, its neighbours usually suffer, too. But this is a structural crisis: German businesses are continuing to shift production to Eastern Europe. No wonder: Germany is a high-tax country and a country with high social security contributions. And it is over-regulated.


Compared to the rest of Europe, the costs of bureaucracy for businesses are high in Germany

WAMBACH: And this is despite the fact that many of these regulations come from Brussels and affect all EU countries. Here, we see the effects of the lack of digitalisation in Germany. Other countries are better positioned digitally and can deal with bureaucracy more efficiently. At least our government wants to cut corporate income tax, albeit too slowly. What is needed now is a comprehensive reform of our social security systems. And there is another issue we still need to resolve. 


Which one?
WAMBACH: In Germany, we encourage people to work part-time.  


How so?

WAMBACH: Our economic system is geared towards part-time work.  In Germany, it is attractive to work fewer hours because net earnings do not increase proportionally when people work full-time. Those who work fewer hours pay less for health insurance, for example, but can still claim the same benefits. With our tax system, it is more attractive for the second earner to work fewer hours, i.e. part-time.


Do we have to work longer hours again?

WAMBACH: Appeals are not enough here. We need to make it financially more attractive to work longer hours by ensuring that there is more take-home pay. The federal government should tackle these reforms. In doing so, it could move away from the recent trend of taking action for the sake of it.

Taking action for the sake of it? What do you mean by that?

WAMBACH: The introduction of the fuel discount falls into this category. This leads to more car journeys at the taxpayers’ expense. And the 12 o’clock fuel regulation, based on the Austrian model, is also a poorly thought-out measure. Since 1 April, petrol stations have been allowed to raise fuel prices only once a day at 12 noon, whilst price reductions are possible at any time.  


The regulation is controversial.
WAMBACH: Researchers from our institute, ZEW, and from the Düsseldorf Institute for Competition Economics have found: After the regulation came into force, petrol margins have shot up by an average of six cents per litre.


The concerns of leading researchers regarding the regulation have therefore been confirmed.

WAMBACH (LAUGHING): Yes, unfortunately. I believe the introduction of the 12 o’clock rule, as well as the decision on the fuel discount, is wrong. Both were implemented to demonstrate a capacity for action. Action was taken, but in the wrong direction. I see another risk with the fuel discount.


What is that?

WAMBACH: The reduction in fuel duty has been announced for a period of two months. The government is thus putting itself under pressure to extend the fuel discount after two months if fuel prices remain high.


Has the federal government scored an own goal with the fuel discount? 
WAMBACH: Yes, I fear that the fuel discount will be extended. In any case, the federal government introduced it too early. If it was the only way to go, the government should have made it clear that it would reduce the discount gradually, say by five cents a month. After all, motorists need to learn to cope with higher petrol and diesel prices, for example, by driving more slowly and less frequently. Oil prices are set to remain high for some time to come. The situation should not be glossed over with taxpayers’ money.


Many people need to rely on their cars though and are suffering from the high fuel prices, especially if they do not earn high wages.

WAMBACH: This is where social policy comes in. The federal government should have asked itself which households cannot cope with the increased fuel costs. The state should provide targeted help to these people. But since the coronavirus pandemic, the public has been left with the impression that the state helps everyone. Yet this is the taxpayers’ money. We are deluding ourselves. After all, many people did respond to the rising fuel prices without any fuel discount: Recently, I’ve been overtaken much less frequently by speeders on motorways.  


In any case, inflation continues to rise. What are your worries? 
WAMBACH: We will see rising inflation. Most recently, inflation in Germany rose from 2.7 per cent in March to 2.9 per cent in April, which is the highest figure since the start of 2024. I expect the European Central Bank, whose main task is to combat inflation, to respond to this. It is not unlikely, after all, that inflation will rise to 3.0 per cent. These price trends suggest that the ECB will raise interest rates.


What happens if kerosene becomes even scarcer and more expensive? That would certainly put pressure on the government to save many people’s summer holidays and continue subsidising aviation fuel. Will this cause an impulsive reaction by the government again?

WAMBACH: Hopefully not. Because that would mean the federal government was showing short-term populist reflexes, in other words, taking action for the sake of it. It is not good policy to support citizens in flying to the Caribbean.  

This interview was published in Augsburger Allgemeine (in German)