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Germany Is Only Interested In Saving Itself

Ferdinando Giugliano

(Bloomberg Opinion) -- For nearly a decade Germany has faced calls from across the euro zone to loosen its fiscal belt. Now that Berlin has finally hinted it might spend more to combat the risk of recession, the rest of Europe has some cause to celebrate. But any jubilation should be tempered.

This week the finance minister Olaf Scholz said Germany can spend up to 50 billion euros ($55 billion) to boost output if its slowdown worsens. The figure, roughly 1.5 percent of gross domestic product, attracted criticism for its limited size but that’s beside the point. Scholz was merely floating a tentative number rather than spelling out a detailed plan. The real news here is that Germany is prepared to spend to drag itself out of a recession.

In a sense this is clearly good for Europe. For years Germany has clung to a set of stringent fiscal rules, making economists wonder whether there was a Teutonic exception to the idea of governments intervening when an economy flounders. The debate even extended to linguistics given that the German word for debt – “schuld” –  is the same as the one for guilt. The conclusion seemed to be that the electorate would punish any stimulus-pushing politician. Germany would wait for the inevitable recession, and drag down Europe too.

There’s no doubt that Berlin should have acted sooner. The German economy is based on exports, so U.S. President Donald Trump’s protectionist lurches were always going to be a problem. Germany could have used a decade of historically low interest rates to improve its infrastructure. Instead it has waited until the very last moment to indicate support for growth. Even a hefty fiscal stimulus might not be enough to get its industrial engine motoring again; that will also need more investment from a corporate sector wallowing in cash.

Yet at least the German political class sounds awake finally to the risk of crisis. In a sense this is similar to 2009, when Berlin did its part in the global fiscal stimulus that rescued the world’s economy from a new Great Depression. Its slight change in tone will be reassuring certainly to Christine Lagarde, the incoming president of the European Central Bank, who can’t rely on monetary policy alone to stave off the renewed threat of recession.

The shift will provide some encouragement too to other European governments, whose economies would benefit from the spillover effect of more exports to the Germans. The signal that Berlin may be about to change its penny-pinching ways could help boost confidence among European entrepreneurs, who might not cut back so much on investment.

Still, there are limits to the optimism. The timing of Scholz’s intervention tells us that Berlin still sees fiscal policy very much as a domestic tool, which depends on what stage of the business cycle the German economy finds itself. This is disheartening for anyone who sees the euro zone as an interconnected whole, where some sort of coordinated fiscal action is needed to safeguard its overall economy and to promote growth.

Germany’s politicians will no doubt see their ability to unleash a fiscal stimulus as just reward for past prudence. The nation’s public debt fell to 60.9 percent of gross domestic product last year, and its bonds have negative yields up to 30 years in maturity. The contrast with fellow euro zone countries such as Italy is striking. In the event of recession, Italy’s gigantic public debt means it would have far less room to expand the deficit without sparking an adverse market reaction.

The broader problem is that this is not how a monetary union is meant to work. Ideally there would be a centralized pot of money, which could be used to help countries facing an economic shock. In the absence of such a joint fiscal capacity, stronger countries such as Germany should have acted much earlier to boost their own demand to help fellow members. Berlin chose not to. It’s taking a German recession to unleash a German stimulus.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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