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Should Germany spend more to revive its economy?



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The euro area has a problem. Its largest economy, Germany, is in or near recession.

This further fueled the debate over whether Berlin should open up to financial wiretaps and spend more.

Should Germany launch a cost program for example on its infrastructure?

Should the government abandon the budget balancing policy known as "black zero" and the related legal limitation on loans called "debt brake"?

We will receive some indications of the impact of the German downturn with new euro area economic growth data on Thursday, although we will have to wait two weeks to review the country's own performance in the third quarter of the year.

  • Germany faces recession threat
  • German economy returns to negative growth

The euro area may not be in recession as a whole, but inevitably the decline in Germany is affecting its neighbors.

The question is what politicians should do ̵

1; especially the German government and the European Central Bank (ECB).

The ECB has already taken steps. It has cut its interest rates to extremely low levels (below zero for one of its main interest rates) and is about to restart a policy known as quantitative easing by buying financial assets with newly created money

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Chancellor Angela Merkel takes a cautious approach to the economy

But there are real doubts as to how effective these measures will be. Many economists believe that monetary policy – what central banks do – has done almost as much as it can in the euro area.

Many argue that governments need to do more. Current ECB President Mario Draghi and his successor Christine Lagarde, who takes over this week, have both taken that view.

In September, Ms Lagarde told the European Parliament: 'Some euro area countries may use part of their fiscal space [government spending and taxation] to improve broadband infrastructure and introduce public spending that will help combat the recession. "

She did not identify the countries that could afford to take such action, but said that this is true for most of them now. The most obvious example is Germany, which has a surplus in its public finances – with tax higher-than-cost revenue – from 2012

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The IMF's chief economist, Gita Gopinath, was emphatic on the subject to the recent global economic outlook of the IMF.

A country like Germany should take advantage of negative interest rates on loans to invest in social and infrastructure capital, "she wrote.

Her reference to negative interest rates refers to the fact that Germany and many other countries can borrow In fact, the financial markets pay them to borrow.

Prof. Peter Boeffinger of the University of Würzburg and a former member of the Council of Economic Experts in Germany agrees with Ms Gopinat that the country should take advantage of these under zero cost of borrowing to invest in infrastructure and social housing.

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Some say that Germany's transport system needs more investment

He is currently saying that net investment in infrastructure – that is, after the existing infrastructure is worn out – is below zero.

The idea that Germany has a problem in this area may come as a surprise. But Professor Boffinger says he often sees the evidence himself. He describes the train journey in the country as "a real adventure – whether the train will arrive, how many minutes and hours delayed, whether you will get something to eat on the train."

"Transport is in extremely poor shape and this is the result of under-investment for many years."

He says that it is a "huge mistake" not to use the opportunity afforded by these favorable borrowing costs to deal with some of these problems.

Reducing Business Taxes?

He thinks that the brake on long and black zero policy makes no sense. If every major government followed a black zero policy, "the world economy would be in the black hole," he says.

Currently, among the G20's leading economies, only two others – Russia and South Korea – have state budgets with surpluses.

But Prof. Boffinger does not support the use of the infrastructure program in the short term as an incentive for the flag economy. The construction industry is already operating at full capacity.

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Some believe Germany is already in recession

What he prefers is more generous tax treatment to encourage business investment, for which, in his view, Germany's economic performance is currently weak.

But there are many defenders of Germany's cautious approach to managing its public finances.

Prof. Clemens Fuest is director of one of the leading economic research agencies in the country, the IFO Institute in Munich. He claims that Germany is not facing a serious downturn – although there may be a technical recession in the sense of two consecutive quarters of dwindling economic activity.

Germany has full employment and currently does not need additional incentives, he argues. However, there is a case of allowing the government to increase its loans if there is a sharp decline in economic activity.

He agreed that the country could benefit from infrastructure improvements, but was nevertheless in better shape than in many other European countries. The problem is not so much the lack of money for projects, he says, but the delay in their implementation is often due to objections made by German residents.

He argued that the debt brake was an appropriate response in 2009, during the global financial crisis, when sovereign debt was higher than GDP and remained a useful constraint.


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