How the traffic light plans increase inflation

Last Updated: 16. Januar 2024By

The Farmer Protests are currently a major topic in the news. German farmers are worried about their livelihood after the Ampel government announced plans to introduce new taxes (namely a vehicle tax on agricultural machinery and an energy tax on agricultural diesel). This is not about the abolition of subsidies, as has been misleadingly reported in mainstream media.

In numerous cities, there have been blockades and long lines of tractors. While part of these tax increases may now be withdrawn, the protests have taken on a life of their own, with haulage companies, restaurateurs, and many other industries joining in.

If the Ampel government still stands by its announced tax increases, what does this mean for the German economy and German stocks as a whole?

How the Ampel plans will increase inflation: Quite simply, by causing a resurgence of inflation – with all its negative consequences. Anyone who decides to increase taxes in agriculture will also increase food prices. Anyone who increases taxes on goods transport (fuel/haulage) will increase the prices of almost all goods. This is because everything has to be transported to the end consumer somehow, and at least the final stretch is usually done by truck. Anyone who increases the value-added tax in the catering industry will also increase prices there.

Higher prices for goods and services mean higher inflation. Higher inflation, in turn, requires a more restrictive monetary policy from the European Central Bank – meaning higher interest rates or at least no interest rate cuts in the foreseeable future.

Is Germany on the way to a severe recession? A more restrictive monetary policy also means that we will continue to have no economic growth in Germany. Last year, Germany’s GDP „growth“ was -0.3%. We saw a recession.

Nevertheless, the DAX rose by more than +20%, as the stock market had already priced in the hoped-for improvement in the situation through future lower interest rates. If this does not materialize now because higher taxes lead to higher inflation and thus higher interest rates, then the stock market will have to devalue this hoped-for relief – with a DAX crash.

You may now say: But the Ampel government has to save money, after its budget tricks were exposed by the Federal Constitutional Court and further borrowing is limited by the Basic Law.

There is certainly potential for savings – but in a sensible way. Right! The question is, where will the savings come from? I have a suggestion: Increase the funding for buses and cycle paths in Peru (315 million euros) may temporarily boost growth in Peru, but not in Germany. However, stimulating Peruvian growth should not be the responsibility of German taxpayers.

The same goes for financing the purchase of luxury SUVs for Nigerian politicians (annual German development aid: over half a billion euros). And why do we actually pay 5.71 billion euros in development aid to India or 0.9 billion euros to China, which are now ahead of us in some areas?

Last year, Germany paid the highest amount of development aid ever – a total of 33.3 billion euros. Many of these projects are highly questionable and have been criticized by the Taxpayers‘ Association as pure waste of money.

By making cuts in this area, tax increases like those mentioned above, which will ultimately further suppress our growth, can be avoided. This would be necessary, at least until domestic growth picks up on its own.

Conditions soon to be like in Holland and France Otherwise, there is a risk that the mild recession of the previous year will turn into a serious crisis with a recession. Then, the peaceful farmer protests will only be the beginning of a potentially much more critical development, as shown by the sometimes violent Yellow Vest protests in France and the uncompromising farmer protests in Holland. The latter led to the resignation of the Dutch government last summer.

As a DAX investor, you should closely monitor the situation. Higher taxes are poison for DAX prices in the medium term.