German minister flags stagflation risk as Ukraine war strains build

GERMANY’S Finance Minister Christian Lindner highlighted the risk of stagflation as the country faces up to the economic perils posed by the conflict in Ukraine.

“The danger of stagflation is real,” he said on Saturday in a virtual speech at a party conference of his liberal Free Democrats, referring to the risk of rapidly rising inflation hitting as economic growth drops. “There is a danger of impoverishment for many people.”

Confidence in Germany’s recovery has been taking a beating as investors worry that price increases triggered by Russia’s invasion of Ukraine will dampen output. The country’s economy is at risk of shrinking nearly 2% this year if the conflict escalates and an embargo on Russian coal, oil and gas leads to restrictions on power providers and industry, the Bundesbank warned on Friday. Bundesbank estimates output losses German economy could face as a result of Russia’s war in Ukraine

If confidence in Germany as a place to invest diminishes, stagflation could “very quickly turn into a much more serious stability crisis,” Mr. Lindner said from Washington, where he’s in quarantine after being laid low with a mild bout of COVID-19. “That’s why we have to take a decisive stand against this.”

Meanwhile, Mr. Lindner also highlighted the need to maintain the economic pressure on Russia in order to “hit Putin’s war chest.” Sanctions put in place by Western nations may need to be kept in place “for months, maybe for many years, and with some probability maybe permanently,” he said.

Mr. Lindner counseled against raising taxes, while also highlighting the need for economic aid to support key industries and support households hit hardest by price increases.