In the past, the idea of fiscal expansion in Germany was considered a forlorn hope. Today, a growing sense that monetary policy alone will be insufficient to stimulate demand and the faltering domestic economy is shifting the terms of the debate.
There are increasing signs that the debate in Germany is shifting toward an acknowledgement that monetary policy cannot be the only game in town, and the only alternative to more accomodative monetary policy is expansionary fiscal policy.
The European Central Bank has become more forthright in telling eurozone governments to get on with fiscal expansion. At the September meeting of the ECB council, in addition to announcing new monetary stimulus, the central bank substantially strengthened its call on governments to boost aggregate demand.
ECB President Mario Draghi said countries with room to loosen their budgets should ‘act in an effective and timely manner’. He repeated his call forcefully at a meeting of European finance ministers in Helsinki the next day.
The doctrine of the ‘black zero’ – an article of faith
In Germany, the ‘black zero’ – a balanced government budget with no new borrowing – has become an article of faith, or a commitment that cannot be questioned.
If there is one issue Germany’s ruling coalition agrees on, it’s this. The objective of a balanced budget is expressly stated in the contract binding the CDU/CSU and centre-left SPD in the coalition.
Earlier this month, both Chancellor Angela Merkel and Finance Minister Olaf Scholz reiterated their commitment to the black zero as they presented the goverment’s budget for the coming year.
For the ruling coalition, the black zero is not an economic, but a political project. This is acknowledged by members of government. For the CSU, Peter Ramsauer sees it as an “important symbol defining the identity of the union between the CDU and CSU.” Finance Minister Olaf Scholz of the Social Democrats doubtlessly fears being saddled with the reputation of profligacy should he bring into question the future of the balanced budget.
Signs of a shift in thinking…
Increasingly, there are signs of consensus among all political partners for more investment in climate change measures, digitisation and new transport infrastructure. Calls for more government spending in Germany have increased with negative interest rates on government debt offering particularly attractive funding terms.
While finance minister Scholz presented a budget that involves no new public debt, the German economy has shrunk so far this year with no sign of a pick-up. Tax revenues are falling. First reactions to the package of budget-neutral measures announced by the ruling coalition on 20/09/2019 suggest it may not be enough.
One possible solution has been proposed by the minister for the economy, Peter Altmaier of the CDU. He has suggested the creation of a foundation for climate protection. This would fund projects to protect the environment. Financing would be raised by issuing bonds paying interest and subsidised by the central government. The debts of this foundation would not constitute part of the central government’s debt burden.
Such an approach could, it seems, be replicated for other government projects to mobilise capital without having to formally renounce either the ‘black zero’ or the debt brake (limiting any rise in cyclically adjusted new debt to the equivalent of 0.35% of gross domestic product) that was written into the constitution in 2009.
Germany’s central government could establish an investment agency that would raise capital in the place of the central government to fund long-term projects. This debt would not be attributed to the central government, although it would subsidise interest paid on the bonds. Such a vehicle could enable the financing of other long-term investments while jeopardising neither the politically sacrosanct black zero nor the debt brake.
For the moment, the debate is ongoing, but the simple fact that it is taking place and leading to such propositions is something of a sea change with regard to a subject that was, up until recently, taboo.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.