“Notorious” and “prudent” are not words often found together, but it is fair to say that Germany is notoriously prudent with its national finances, thanks to a longstanding rule requiring politicians to balance the federal budget — an unimaginable scenario in virtually any other country. The “black zero” rule, and the popular attitudes it reflects, are generally considered the legacy of Germany’s historic bout of hyperinflation in the 1920s, with left long-term psychological scars in addition to helping pave the way for National Socialism. However over the last decade a growing chorus (though by no means all) of economists and policymakers has called for Germany to abandon the policy and provide at least modest fiscal stimulus to the economy in order to ward off an economic downturn, which seems increasingly likely amidst signs of slumping manufacturing and exports. However the government must take care to direct this funding to productive parts of the economy, economists warn.
- The Financial Times quotes Claus Michelsen, head of forecasting and economic policy at the German Institute for Economic Research, who warns that Germany’s traditional fiscal prudence is looking more unwise: “Sticking with the black zero as an end in itself would be fundamentally wrong. To save just as the economy weakens only increases the problems.”
- Dieter Kempf, head of Germany’s BDI industry federation, has also pleaded with the government to drop the “black zero,” a position echoed by managing director Joachim Lang: “Sticking with the black zero in the coming years must not be a dogma. Old concepts do not help us solve the current challenges.”
- However fiscal stimulus will be tricky, as noted in a separate opinion piece in the FT by Mohamed El-Erian. For one thing, Germany’s recent strength has masked a two-track economy — one export-oriented, now suffering because of a global downturn, and the inward-focused domestic economy composed of services and other sectors, which is still booming. Directing resources to the latter would simply cause it to overheat, but it’s unclear how stimulus can help export-focused sectors, since their problems are due to external, global factors.
- Additionally, the promise of more spending by Germany could discourage needed reforms within companies as well as in European countries that stand to benefit from a German rebound. The FT thus calls for careful, targeted stimulus that avoids competing with the private sector, focused on areas like infrastructure, digitalization, and training and education.