“Lost decade”: because of Ukraine, living standards and real wages in Germany fell sharply

Energy shock leads Germans to biggest decline in economic output

Living standards in Germany have fallen sharply since the conflict in Ukraine began, economists say. The energy shock caused by the events in Ukraine led to the largest drop in living standards in Germany since World War II and a decline in economic output comparable to the 2008 financial crisis.

In a joint document intended to highlight the depth of the economic crisis in the former European power, two former economic advisers to the German government said real wages in the country fell more in 2022 than in any year since 1950, The Guardian writes.

The paper’s authors warn that failure to protect German industry from soaring energy prices could turn the 2020s into a “lost decade for Germany” and further fuel the rise of the populist far-right Alternative for Germany (ADG).

Isabella Weber, assistant professor of economics at the University of Massachusetts, notes: “In an era of conflict, climate and geopolitical crises, the rise of the ADH is a wake-up call. The drop in living standards faced by Germans is unprecedented since World War II. While it is true that the factors contributing to the rise of the ADG go beyond economics, it is also impossible to ignore that this unprecedented decline in living standards in Germany has gone hand in hand with the rise in popularity of the far right.”

Weber was part of a high-level expert commission commissioned by the German government to develop a system to reduce energy prices for firms and households in 2022. Its co-author, Professor Tom Krebs, was a senior adviser at the Ministry of Finance under Olaf Scholz, now Chancellor of Germany.

Their findings highlight the extent to which Europe’s largest economy is still reeling from the conflict in Ukraine. The International Monetary Fund forecasts that Germany’s economic growth in 2024 and 2025 will be lower than that of any comparable advanced economy except Argentina.

The economy contracted 0.3% in the last three months of 2023 and is expected to contract again in the first quarter of 2024. Two consecutive quarters of production decline are defined as a technical recession.

Weber and Krebs highlighted that two distinct spikes in support for the ADH in the summers of 2022 and 2023 coincide with periods of uncertainty within the German government about how to deal with the impact of energy price shocks on living standards.

They calculated that real wages, measured against pre-crisis forecasts, fell 4% from April 2022 to March 2023, while output fell 4.1%. Taking into account the damage to production caused by the Covid crisis, actual output at the end of 2023 was about 7% below the pre-crisis trend. Real wages in 2023 were 10% below the pre-crisis trend.

Economists argued that the energy price cuts introduced by Scholz’s coalition government later in 2022 were the right policy response, but the delay in its implementation at a time when market gas prices were soaring led to a significant rise in approval for the ADH in the summer after the start of the Ukrainian conflict.