Germany: Inflation and Far Right, a Dangerous Mix

The surge in energy costs has triggered a recession that has exposed economic vulnerabilities. Simultaneously, increased inequalities are fueling the resurgence of far-right political forces. According to the Bloomberg consensus, after reaching 11.6% last October, inflation in the largest European economy could drop to 6.4%.

But the rise in prices and the unprecedented barrage of interest rate hikes triggered by the ECB in response are painful. And even as their end is approaching, inflation is expected to persist. The traditional German aversion to inflation, rooted in the hardships of the 1920s, was revived in 2022.

As a century ago, the resulting economic difficulties have proved to be fertile ground for populism. Support for the AfD in Germany has reached record levels in recent months, propelling the far-right party ahead of Chancellor Olaf Scholz’s centre-left Social Democrats.

For the poorest, inflation has been particularly pronounced; food prices, representing a larger share of their expenses than wealthier households, have risen twice as fast as overall prices. Requests for food aid have increased so much that the food bank association, Frankfurter Tafel, has been forced to freeze new distributions.

It is understood that overall inflation is decreasing. Unfortunately, as often happens, it will take more time for underlying inflation to decline. At the same time, the government is also reducing support measures that helped keep heating bills low after the Ukraine war, which caused energy prices to skyrocket.

Chancellor Scholz is optimistic about overcoming inflation, describing Germany as “perfectly capable of tackling the issues of our time.” Initiatives include the rapid installation of liquefied natural gas terminals to reduce energy costs and investment in the green transition to maintain affordable electricity for an industrial sector that has become dependent on low-cost Russian fuel.

Unfortunately, he has lost much credibility, and the initially praised energy crisis management has quickly turned into a fiasco. The energy choices made by the Chancellor could prove disastrous for a German industry that has grown and thrived on energy sources close to its borders and cost-effective. Russia has turned towards Asia, and Germany has yet to secure long-term energy sources at an affordable price for its industry.

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