schwarze null

Any other country that had run a budget surplus for the last five years and was now facing a recession would have a clear response. Indeed, the pressure on policymakers to open the spigots would prove irresistible. But Germany is not like any other country. Despite entering a downturn the eurozone’s biggest economy is still — officially at least — clinging to its mantra of schwarze Null, or “black zero”, its commitment to a balanced budget. Under Angela Merkel, the policy has come to resemble an article of faith, the closest thing there is to a national ideology. Yet with much of Europe teetering on the brink of recession, there are growing calls for Germany to put its orthodoxy aside and stimulate its economy by borrowing and increasing spending. Critics of 'black zero' say it hampers investment into much needed new infrastructure, such as railways © AFP “Germany has perhaps a unique combination of need for fiscal stimulus and capacity to do fiscal stimulus,” says Jason Furman, who chaired the Council of Economic Advisers under US President Barack Obama. “I can’t think of a place in the world today where the argument for fiscal stimulus is stronger than it is for Germany.” There are signs that the tide is starting to shift within Germany as well. An expanding chorus of politicians, economists and think-tanks has been championing a looser attitude to debt. The current approach, they say, is too doctrinaire, and hems Germany in at a time when it desperately needs new investment to repair its crumbling infrastructure and modernise its economy. “It has become an end in itself,” says Michael Hüther, head of the German Economic Institute. Foreigners have long been bewildered by German fiscal policy. French President Emmanuel Macron last year criticised Germany’s “perpetual fetish” for budget and trade surpluses that “always occur at the expense of others”. US President Donald Trump has made similar attacks, although American criticism predated his arrival in the White House. Solar panels on Berlin rooftops. Germany has committed to reduce its greenhouse gas emissions by 55 per cent by 2030 © Bloomberg “We were frustrated by both Germany’s preaching fiscal restraint for others and its unwillingness to use fiscal channels to expand its own demand,” says Mr Furman. The belief among German policymakers that deficits hurt the economy can feel, he adds, “quasi-theological”. German officials argue that the balanced budget rule has not wrought any visible harm to the economy. The country has had nine years of growth — the longest uninterrupted run since 1966 — with the highest levels of employment since reunification and surging tax receipts. It has run surpluses since 2014 and paid down large amounts of debt while still increasing spending. Yet the fat years may be over. German gross domestic product contracted by 0.1 per cent in the three months to June, and the Bundesbank warned it will probably tip into recession in the third quarter. A country that had until recently been the eurozone’s star performer is now its laggard, hobbled by the deepening US-China trade war and the prospect of a disorderly UK exit from the EU. Ms Merkel examines a turbine at the Siemens plant in Goerlitz, eastern Germany © AFP In light of the worsening data, once wholehearted advocates of schwarze Null are changing their tune. “In a fragile economic situation, black zero should be put under review,” says Joachim Lang, director-general of the BDI, the main German business lobby. “German fiscal policy must change.” The debate within Germany comes at a critical time in Europe. Next month the European Central Bank is expected to unleash a fresh wave of monetary easing, cutting rates further into negative territory and restarting its bond-buying programme. But the impression is forming that it may have run out of ammunition in its battle to boost inflation and stimulate growth in the eurozone. There are increasing calls for governments to take up the baton and do their bit — particularly in Germany. Paul Krugman, the Nobel Prize-winning economist, suggested this week that the world had a “Germany problem” because of its “ruinous obsession” with debt. The solution is to increase borrowing and boost spending, he wrote in the New York Times, adding: “But spend they won’t.” The origin of Germany’s obsession with balanced budgets can be traced to the early 2000s, when it was considered the sick man of Europe. Its exchequer was drained by the cost of reunification. Unemployment was soaring and debt spiralling. Economists began to float the idea of a strict rule that would force governments to curb their profligate ways. The discussion culminated in Germany’s adoption of the so-called “debt brake”, inscribed in the country’s constitution in 2009, which limits the federal government’s structural deficit to 0.35 per cent of gross domestic product and bars its 16 regions from running any deficits at all. Ms Merkel provided a homespun justification for the policy in 2008, three months after the collapse of Lehman Brothers. The “Swabian housewife”, the national symbol of prudence and common sense, could have predicted the crisis, she said. “She would have given you this piece of worldly wisdom: you can’t live beyond your means forever.” Germany's exports have declined amid concerns of a global slowdown © DAVID HECKER/EPA-EFE/Shutterstock A lot has changed in the world since the debt brake was introduced, particularly interest rates. Long-term German bonds have been trading at close to zero for much of the past couple of years, driven down by the ECB’s loose monetary policy. Indeed, yields recently turned negative for 30-year German bonds, meaning investors were effectively paying Germany to borrow. Yet Berlin has refused to budge. Asked last month whether she might abandon black zero now that Germany was heading for recession, Ms Merkel demurred. Germany was one of the “oldest countries in the world” and its ever-shrinking pool of young people could not be burdened with rising debt, she said. However, with interest rates so low, it is becoming harder to argue that new borrowing will hurt future generations, says Mr Hüther. Once a strong advocate of a constitutional debt brake, he is now firmly in favour of loosening the purse strings. “The fact we are now in compliance with the Maastricht criteria gives us the scope to take on new debt for investment purposes, but that is hard to do under the debt brake,” he says. Mr Hüther is calling for a big new national investment vehicle financed by government bonds — he nicknames it the “Deutschland Fund” — which would invest €450bn over the next 10 years in climate change measures, digitisation and new transport infrastructure. Some senior finance ministry officials have privately welcomed the idea. 'Germany has perhaps a unique combination of need for fiscal stimulus and capacity to do [it],' says Jason Furman © Bloomberg That Germany badly needs more investment is now consensus among all its political parties. There is a dire shortage of affordable housing in major cities, its roads and bridges are in a poor state of repair, its rail network is unreliable and its internet connections are slow. A potential turning point in the debate could come next month, when the Merkel government will unveil an ambitious package of green measures designed to help Germany reduce its greenhouse gas emissions by 55 per cent by 2030. Ms Merkel, who steps down as chancellor in 2021, has said the days of “tinkering at the edges” are over. The proposals so far submitted to Olaf Scholz, the Social Democrat finance minister, by his cabinet colleagues would cost more than €30bn over the next four years. “It’s clear we can’t afford all of that without new borrowing,” says one adviser to Ms Merkel’s Christian Democratic Union. Recommended Christian Odendahl Dogma and complacency put the German economy at risk The measures will be financed out of the government’s energy and climate funds, which have built up huge reserves. But ministers may face a funding gap, especially if the economy continues to deteriorate and tax revenues decline. That might be the moment it pulls the plug on black zero. Ministers do have some — limited — room for manoeuvre. Under the rules of the debt brake, the government can borrow new debt up to the equivalent of 0.35 per cent of GDP, or roughly €5bn-10bn a year: the figure rises as the state of the economy worsens. But there is still deep reluctance in both Ms Merkel’s CDU and Mr Scholz’s SPD to ramp up spending. The Social Democrats fear that their priorities would be sidelined. “If we say we’re going to give up the black zero, we’ll immediately have demands for €30bn-40bn in corporate tax cuts and a €60bn increase in military spending,” says one person familiar with Mr Scholz’s thinking. “And neither of those are leftwing projects.” 'German fiscal policy must change,' says Joachim Lang, director-general of the BDI, the German business lobby © EPA-EFE Finance ministry officials still urge caution. “A wait-and-see approach gives you more options,” says one. “Dropping the black zero is irreversible. Sticking with it, on the other hand, is reversible.” That view is also shared by Ms Merkel, for whom Germany’s balanced budget has become a badge of honour. The woman who pulled the plug on nuclear power, abolished national service and introduced a minimum wage already stands accused by conservatives in her party of sacrificing core CDU principles in pursuit of the centre-ground. The commitment to black zero is one of the last Christian Democrat shibboleths to have survived the Merkel-era drift to the left. “The whole idea of repairing the public finances is part of the CDU’s brand, and that’s why they’re still so wedded to it,” says Mr Hüther. Ms Merkel might never be forgiven by her party for throwing black zero overboard, say some. “The idea of a balanced budget is really popular with voters, and dropping it will really erode public trust in the CDU,” says the Christian Democrat adviser. “Merkel could face a serious rebellion in the party if she allows this to happen.”