Germany’s Obsession With Fiscal Prudence Needs to Go
You can have too much of a good thing — even, as Germany proves, financial self-discipline.
With the economy on the verge of recession and growth in the wider euro area sputtering out, a strong fiscal stimulus is needed from Berlin. Under conditions like these, fear of public borrowing is the opposite of prudent. The government is running a budget surplus and talking only vaguely about additional spending — at some point, maybe, should the need arise.
The need has already arisen. German business confidence has slumped to a seven-year low. The economy shrank in the second quarter, and the Bundesbank has warned that output may fall again in the third. Two quarters of decline equal recession.
Nor is there a good reason to stand pat. Germany’s public debt is barely 60% of gross domestic product, compared with an average of 85% across the euro area. At the moment, the country is so awash in savings that its cost of long-term borrowing is negative: Lenders are willing to pay Berlin to take their money. In addition, the extra borrowing could be put to excellent use, because Germany is a high-tax economy with an increasingly evident backlog of spending on infrastructure. Lower taxes and new public investment would make sense even if the economy wasn’t contracting.
What’s more, this isn’t just about Germany. The outlook for the euro area as a whole is so gloomy that the European Central Bank is signaling its intention to provide a substantial new monetary stimulus at its next policy meeting on Sept. 12. Trouble is, the euro-area policy rate is already minus 0.4%, and the ECB’s enormous bond-buying program, currently on hold, is bumping up against limits on what it can legally acquire. Further monetary stimulus is possible, but it would be less straightforward and quite possibly less effective than a firm fiscal push from Germany.
Note by the way that negative interest rates are no more popular in Germany than budget deficits. Thanks to super-cheap money, banks are seeing their profits and retail businesses squeezed. Savers, already complaining, will complain a lot more if banks start passing negative rates along to small depositors, instead of confining them to corporate lenders and individuals with very large balances. Indeed, some German politicians are calling for any such move to be banned.
The longer it takes Germany’s government to implement an appropriate fiscal policy, the more the ECB will be driven to take extreme monetary measures — and the less Germans will like it.
Germany’s government should set aside its “black zero” (no borrowing) policy immediately, and come forward with new fiscal plans. It should also start revising a debt-brake provision that was added to its constitution after the financial crisis in 2008; this allows some public borrowing, but at times like this not enough. For sure, these changes will take some explaining, but that doesn’t make them any less necessary. Put it to voters this way: Failing to act would be the height of imprudence.