Germany's Economic Slowdown Tests Its Frugal Spending Ways

Germany's Economic Slowdown Tests Its Frugal Spending Ways

“After a decade in which we had a strong economy with very high employment and solid public finances, Germany has some breathing space — despite the debt brake," says Joachim Lang, managing director of the German BDI.

SourceAlexander Koerner/Getty

Why you should care

Europe’s largest economy has long held a balanced budget as an article of faith. Now Germany faces pressure to spend more to avoid a recession. 

The German government’s seemingly cast-iron commitment to balanced budgets has come under renewed pressure after news this week that Europe’s largest economy shrank in the second quarter triggered a fresh round of appeals for Berlin to ramp up spending.

Germany’s output fell 0.1 percent in the second quarter from the previous three months as trade tensions weighed on its export-heavy manufacturing sector, and particularly its powerful car industry.

The balanced-budget approach — known as the schwarze null, or black zero — has been an integral part of German government policy for years. The federal budget has been in surplus since 2014, and the commitment not to take on new borrowing was formally enshrined in the coalition treaty between Angela Merkel’s Christian Democrats (CDU) and the center-left Social Democrats (SPD) last year.

Everybody is calling for more public-sector investment — and that is necessary — but it is not going to solve the immediate problems.

Katharina Utermöhl, Allianz

In recent weeks, however, the schwarze null has faced growing criticism from economists, business groups, opposition leaders and even from individual members of the government coalition. One of the most striking attacks on the policy is coming from the BDI industry federation, normally a bastion of German economic orthodoxy.

“We are looking ahead to some gloomy months, which could turn into years if there is no forceful political response,” says Joachim Lang, the managing director of the BDI.

Lang says the government needs to abandon the black zero commitment but stick with the provisions of the so-called debt brake that is anchored in Germany’s constitution. The debt brake forces the federal government to keep its structural deficit at less than 0.35 percent of gross domestic product; that provides at least some leeway for Berlin to go into deficit.

“After a decade in which we had a strong economy with very high employment and solid public finances, Germany has some breathing space — despite the debt brake,” Lang says. “Especially since the state is currently able to borrow at negative interest rates.”

The debt brake was “more important than achieving the so-called schwarze null,” he adds. “Now is the time for Germany to change its financial policy.”

A similar appeal is coming from the opposition Green party, which is riding high in the polls and has recently eclipsed the Social Democrats as the leading force on the German Left.

“What is even more disappointing than the economic data [is] that the government is still not doing anything to counter this long-expected economic downturn,” says Anja Hajduk, the deputy leader of the Green parliamentary group. She is calling for more public investment in the economy and more funds to counter the threat of climate change. “If the government wants to pursue an economic policy that looks to the long term, it cannot give priority to the schwarze null over indispensable investments in our future,” she says.

For the moment, however, there is little sign that the government intends to budge. Both Olaf Scholz, the SPD finance minister, and Merkel herself have made clear in recent days that they stand by the commitment to balanced budgets. That stance was reaffirmed by a government spokeswoman on Wednesday, who told journalists in Berlin that the German economy — despite the second-quarter decline — was on track to grow over the course of 2019. Unemployment was down and wages were increasing in real terms, she said: “Against that backdrop, the government currently sees no need for measures to stabilize the economy. Fiscal policy at the federal level is already orientated toward expansion.”

Marcel Fratzscher, president of the DIW think tank and professor of macroeconomics and finance at Humboldt University of Berlin, is one of several prominent German economists to criticize the government’s determination to defend the schwarze null. “The discussion is heating up, but in my view it is too late already and what they do will not be enough,” he says. “You still have the finance minister and the chancellor saying that now is not the time for a fiscal stimulus.”

Fratzscher predicts that the government will announce a package of spending plans and tax cuts next month under the umbrella of helping Germany make its economy greener. But this is likely to be insufficient, he warns. “The automotive industry is under intense pressure to adjust its business, and this is a long-term challenge, but we have for too long had far too little investment in research and development and infrastructure in Germany,” Fratzscher says. “We need a 10- to 15-year investment program in digital infrastructure, R&D and education.”

Another proposal being championed by some economists is a scrappage scheme to encourage new car purchases — as the government introduced after the 2008 financial crisis. Katharina Utermöhl, senior economist at Allianz, says, “The pattern is quite similar to what happened in the car industry in 2008, but it is not going to snap back as quickly this time. Everybody is calling for more public-sector investment — and that is necessary — but it is not going to solve the immediate problems.”

Such a policy, dubbed a “cash-for-clunkers rebate,” could focus on promoting e-mobility and would be relatively quick to implement, Utermöhl suggests. “However,” she adds, “in view of the car scandals of recent years, such a step could be politically controversial.”

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By Tobias Buck and Martin Arnold

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