Wednesday 21 August 2019

German ministers urged to rethink deficit stance

German Chancellor Angela Merkel. Photo: AP Photo/Czarek Sokolowski
German Chancellor Angela Merkel. Photo: AP Photo/Czarek Sokolowski

Leonid Bershidsky

Germany is on the brink of a recession. This is not happening because of any structural problems: US president Donald Trump's trade wars are the main culprit. Still, its powerful industrial lobby is openly questioning the government's adherence to the famous 'schwarze Null', or zero budget deficit, policy.

Output shrank by 0.1pc in the second quarter compared with the previous three months. The contraction is a consequence of a drop in industrial production and construction that amounted to 0.6pc of gross domestic product. Government spending and domestic demand, which was stronger than in the first quarter, compensated for most of this decline.

Germans have not felt too much pain from weakening demand for the country's export goods, especially cars and machinery. Unemployment dropped to a record low of 3.1pc at the end of June.

Yet with more trade shocks possible, pressure is mounting on the German government to do more to boost the economy. The Greens and some Social Democrats from the party's left flank have called for more government spending to fund a quicker green energy shift and infrastructure improvements. But more importantly, the country's mighty industrial lobby, the Federation of German Industries (BDI), has also argued for re-examining the deficit-free policy.

In an op-ed published in the business daily 'Handelsblatt', BDI chief Joachim Lang called for investment incentives for innovation and government funding for artificial intelligence, plus a stronger digital infrastructure. While the government can borrow at negative rates, it should go to the financial markets and obtain "a double-digit billion amount in the medium term" for a state venture fund; it should also cut taxes for businesses by €15bn to €20bn to stimulate private investment.

"Unlike the debt brake, which is enshrined in the constitution, the schwarze Null ought be re-examined given the fragile situation," he wrote.

Germany's constitution, indeed, limits the structural budget deficit to 0.35pc of economic output and only allows a bigger shortfall during a slowdown if it is repaid when growth picks up again.

But Germany's negative borrowing costs make the government's determined stinginess rather illogical to an increasing number of political players. Chancellor Angela Merkel's ruling Christian Democratic Union clearly will not be penalised by its traditional support base for loosening the purse strings in such a situation.

Ms Merkel and her chosen successor, defence minister Annegret Kramp-Karrenbauer, as well as finance minister Olaf Scholz, have defended the deficit-free policy. They have argued that the current budget surplus provides enough flexibility for added spending if needed, and more stimulus would come from the planned elimination of the so-called solidarity tax, meant to boost the economic development of Germany's eastern states, in 2021.

On Tuesday, though, Ms Merkel gave the first indication that this conservative stance could be reconsidered if things get worse.

It is unclear what it will take for her finally to change her mind. In a way, it is sensible for her and Mr Scholz not to rush things. Giving up the schwarze Null would be a major turnabout, and the government needs a strong reason for it. The CDU and the Social Democrats do not want to be seen yielding to pressure or engaging in cheap populism to win back voters.

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