There is no ‚German problem‘ in the Eurozone
Germany has recently been criticised for its current account surplus, urged to spend on investment to reflate Europe’s markets. However, domestic demand has been growing lately and additional investments would only have a marginal impact on export growth in countries where this is needed most. Europe must face the truth: it seems unlikely that Germany will back a ‚large pan-Eurozone fiscal stimulus‘.
Germany is under pressure. Voices of political leaders and experts from other European countries have become louder, criticising Germany for refusing to take measures against the deepening crisis. For example, Simon Tilford, deputy director of the London-based Center for European Reform (CER), identified ‚the Eurozone´s German problem‚ as weak public and private investment combined with an export-dependency of Europe´s biggest economy. According to Tilford, Europe needs a ‚grand bargain‘: a boost in government spending plus quantitative easing by the European Central Bank (ECB) in return for structural reforms in France, Italy and elsewhere. This line of argument goes well with claims of politicians from France and Southern Europe for more debt financed investments, such as the proposal of the French government to save 50 billion Euros in its budget – if Germany invested the same amount.
The demands to increase spending have put Sigmar Gabriel, leader of the Social Democrats (SPD), in a difficult position. On the one hand, many of the propounded arguments are worth considering from a social democratic point of view, not least against the backdrop of a crumbling public infrastructure in parts of the country. Also, the struggles of his fellow social democrats in government in France and Italy must matter to Gabriel. He has repeatedly called for strengthening progressive alliances across the EU.
On the other hand, the coalition treaty between the Christian Democrats (CDU/CSU) and SPD commits Gabriel to ’strict compliance‘ with the German constitutional debt brake and heralds a budget without new borrowings for 2015 onwards – a target not only the conservatives, but also the SPD and Greens have committed themselves to for some time, and which was also part of the 2013 Social Democratic election manifesto. This means that all major parties expect the Left go beyond the debt brake, which confines the federal state’s structural net borrowing to 0.35 per cent of GDP. On this issue, they represent the majority opinion of the German people: in a recent poll, 62 per cent said the state should not incur more debt due to a slowing economy, only 34 per cent approved (Politbarometer, 24.10.2014).
It is no wonder Sigmar Gabriel is trying to avoid a domestic debate about a zero-deficit budget in 2015. Instead of questioning the ‚black zero‘, as it is dubbed, Gabriel rather talks about the investments the government plans anyway. Also, he regularly praises European Commission president Juncker´s 300-billion-dollar investment plan for the EU. And in order to strengthen ties with France, he and his French counterpart as Minister for Economic Affairs, Emmanuel Macron, assigned the economists Henrik Enderlein and Jean Pisani-Ferry a common task – developing ideas on how to improve the economic situation in both countries and identifying cooperation projects between Germany and France.
While the SPD is trying to find a political direction in the fiscal-stimulus-debate, the academic question is if the allegations from the outside are true. Are the Germans a bunch of boneheads who do not understand macro-economics, thus paving the way for populism, deflation and eventually a Eurozone break-up, as Simon Tilford suggests? Certainly, a lot of critical arguments can be made about the austerity measures enforced by the Troika, as well as the at times arrogant attitude of the previous German government, which basically denied any responsibility for the Eurozone crisis. The sad result is that Germany´s reputation has suffered dramatically among the people in many EU member states.
However, concerning the current requests to boost government spending, the coalition of the CDU/CSU and SPD is well advised not to overreact and to change its course only moderately, if at all. Unlike Simon Tilford and others claim, German public finances are not in good shape, especially bearing in mind a large ageing demographic in Germany. The federal deficit is still 75 per cent of GDP, failing the Maastricht criteria by 15 percentage points. At the same time, the basic economic data in Germany is still positive, even if the economy is growing on a lower level than expected before the summer. When, if not now, shall Germany dismantle its deficits and debts which arose due to bank stabilisation measures and anti-cyclical spending packages in 2008/2009? Is it not more reasonable to keep the powder dry in case a real recession occurs?
Plus, domestic demand has been rising in Germany lately, and it is far from certain if a fiscal stimulus in Germany would reflate European markets. According to a European Commission study on current account surpluses in the EU, additional investments would likely only have marginal impact on export growth in countries where this is needed most. The Netherlands would be the main benefiter. To provide for a perceptible fiscal stimulus for Europe, Germany would have to refrain from the debt brake altogether, which is politically impossible and could gamble away Germany´s good image with capital markets. Also, how can Germany demand fiscal discipline from other countries if it strips away its own principles at the first opportunity?
Even if the German government decided to open up the purse and take on additional debt on a large scale, credit-financed investment programs are an ineffective measure to fight short-term recessions. To complicate matters further, it would be a tough job to come up with projects on which to spend money with short notice. Such investment plans do not exist. Plan approval procedures can take years. And the more quickly the money has to be spent, the more likely there will be negative side effects. For example, the scrappage allowance for old cars in the 2009 package has led to perfectly functioning cars being destroyed.
Yesterday, Finance Minister Wolfgang Schäuble announced additional investments of 10 billion Euros in education, construction and transportation infrastructure between 2016 and 2018, while the zero-deficit-target is supposed to be reached anyway. From the perspective of Germany´s critics, this amount is too little, too late. But it may relieve some pressure in the debate.
Only if the economy slows down further will the government eventually move away from the ‚black zero‘ and start using the scope allowed by the debt brake targets, without breaching it. Hopefully, the additional money spent will not provide for a flash in the pan, but will tackle Germany´s structural growth problems. At the same time, the coalition has already started to increase efforts to strengthen private investments. Much hope lies in the assumption that investors are looking for new, conservative investment possibilities.
Europe must face the truth: it seems unlikely that Germany will back a ‚large pan-Eurozone fiscal stimulus‘. While a macro-economic debate is necessary (and Germany has some catching up to do on the issue), it should not divert attention from the long-term weaknesses of Eurozone members, be it inflexible labour markets in France or Italy, high labour costs in Austria – or a shrinking labour force, an unsustainable pension system, weak education institutions and a lack of entrepreneurial spirit in Germany.