The head of a leading German economic think tank called for wages in Germany to be increased in line with inflation to avoid worse consequences down the road.

The comments from Marcel Fratzscher, president of the German Institute for Economic Research (DIW), came in an interview with the public broadcaster Deutschlandfunk on Tuesday.

Like much of the world, Germany is experiencing rapidly increasing prices due to inflation. But as prices go up, consumption falls, potentially triggering even bigger economic problems.

The economist said that without pay hikes, "businesses will run into trouble, unemployment will rise and then we will get into a spiral of ever weaker growth and higher inflation."

He also warned that prices will continue to go up "over the next five to ten years."

Future uncertainty looming large

Inflation had already begun to soar before the Russian invasion of Ukraine, but the war has only exacerbated problems. Fratzscher said that the main issue was insecurity about the future and high prices are currently being driven by speculation.

"Worry about the future is driving up prices," he said. People are holding back out of fear that there will not be enough. The DIW president called the uncertainty about "what could come" is perhaps the biggest problem.

However, he also offered solutions, saying that targeted support — such as the €300 ($325) for every employed person to tackle rising energy costs — was the right move.

He also suggested bringing the already reduced rate of VAT from 7% down to 0%. This along with higher wages would "keep consumption buoyant."

Spending over saving

Fratzscher's proposals deviate from Germany's recent tradition of saving and low borrowing. He said that the "debt brake" would not be able to last until the end of the decade.

He called for the government substantially increase its investments, particularly in renewable energy, digitization and education.

But the economist warned against "populist measures" such as a price cap on fuel, saying that this "doesn't reduce energy consumption, but ultimately throws a large part of this money down the throats of oil companies."

The German government recently announced the largest increase in pensions in over a generation, a year after the coronavirus pandemic meant that pensions were kept stagnant.

The increase of 5.35% is the biggest since 1983 and was intended to help pensioners facing the rising cost of living.

ab/wmr (AFP, dpa)