Energy Price Brakes and Tax Relief: Germany's Anti-Inflation Policies After the 2022 Terms-of-Trade Shocks
The price shocks of 2022-2023 gave rise to soaring inflation and economic stagnation in Germany. In response, the German government adopted various policy measures with the threefold aim of stabilizing the economy, reducing the social divide, and preventing second-round effects that risk inflation persisting. These policies were largely successful. Given the transitory nature of the shocks and the limited second-round effects – contained in part by targeted fiscal measures in the euro area – the ECB's strongly restrictive policy stance unnecessarily intensified economic weakness in the euro area.
GERMANY IN THE WAKE OF A HISTORIC TERMS-OF-TRADE SHOCKFor the German economy, the increases in energy and food prices during the intensifying Ukraine conflict and especially after Russia's invasion of Ukraine constitute a terms-of-trade shock of historic dimensions. While countries around the world were affected by the spikes in global food and energy prices, the terms-of-trade shock was particularly large for Germany, which meets its primary energy needs mainly through imports and is especially dependent on the hard-hit Central European gas market. According to Dullien et al. (2022a), in mid-2022, it looked as if the terms-of-trade shock from energy prices alone would amount to 5.5% of Germany's GDP. The price increases for natural gas in this period dwarfed the increase of crude oil prices during the oil crises of the 1970s and 1980s –…