Extreme Economics

Germany's Austerity Absolutism Endangering Euro Zone Growth

ECB President Draghi talks to Germany's Chancellor Merkel during European Union leaders summit in Brussels
You know, it doesn't hurt to spend a little more.
  • Why it matters

    Why it matters

    A zero deficit goal prevents Germany from helping the euro zone’s economy recover.

  • Facts

    Facts

    • The German finance minister wants the country to end deficit spending.
    • Mario Draghi, the ECB president, wants euro zone countries to stimulate growth.
    • Germany is strong enough to sustain a higher level of euro-zone public spending.
  • Audio

    Audio

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Wolfgang Schäuble is not the first finance minister by a long shot to dream about a federal budget deficit of zero.

The Social Democrat Alex Möller was the last of Mr. Schäuble’s predecessors to live that dream. But that was 45 years ago. And yes, his party was accused for decades by its opponents, the right-wing Christian Democratic Union, of not being able to deal with money.

It’s easy to understand CDU member Mr. Schäuble’s ambition to end government deficits. He has a good chance to achieve the objective, as planned in the budget, even if the German economy has slowed down a bit.

But is this even the right objective? Isn’t the federal government’s rigorous budget discipline exacerbating Europe’s growth problems? Shouldn’t a responsible financial policy have other priorities?

One look at the euro zone’s weak economic prospects should be reason enough for Chancellor Angela Merkel and her finance minister to have a serious talk. It undoubtedly was important to have Germany as an anchor of stability during the worst phase of the  European debt crisis.

International investors view Germany as a safe haven. It has gradually put its public finances in order and barring the international financial crisis, it would probably have been able to present a debt-free federal budget much earlier. Germany had shown that budget discipline and economic growth were not a contradiction in terms, even if politicians in some European capitals still maintain the opposite is true.

Having no deficit is not an end in itself, however. Of course, deficit worries make it easy for Ms. Merkel to reject spending requests from the coalition partners, which include the CDU, its Bavarian sister party, the Christian Social Union, and the Social Democratic Party. 

Isn’t the federal government’s rigorous budget discipline exacerbating Europe’s growth problems? Shouldn’t a responsible financial policy have other priorities?

But at the same time, it prevents Germany from giving much-needed economic juice to the euro zone. Mario Draghi, the European Central Bank president, has recognized the problem and in the last few days rightly called for a rethinking of fiscal policy. Specifically, he demanded additional spending to spark growth without breaking the European stability pact’s budgetary rules. 

Mr. Draghi’s stance could be interpreted as an admission of failure of all monetary policy instruments employed so far. It could also be understood, though, as a wake-up call to politicians to meet their responsibility for bringing about Europe’s economic recovery.

Germany, which for years has followed the maximum deficit rule of 3 percent of gross domestic product and will probably report a surplus this year, would certainly have financial leeway for a more expansive fiscal policy. The same applies to Austria, the Netherlands, Finland and Luxembourg.

In Germany, reforms to enhance growth are affordable and urgently needed. Like the removal of the income tax “cold progression,” the term for Germany’s very unprogressive income tax, which places most of the burden on the middle class.

The chancellor wanted to keep the cold progression in the previous legislative session, but now rejects it, saying budget consolidation is a priority. Also necessary is additional spending on public infrastructure to halt the decay of schools, roads and bridges. Tax-financed research and better depreciation rules for companies are needed too.

The federal government’s rejection of such reforms damages not only Germany as a business location, but also the economic recovery in Europe’s crisis-ridden countries. It is dangerous to attach more importance to the short-term success of a zero budget deficit than to a responsible financial policy for Europe. Few politicians fight harder for the European project than Mr. Schäuble, so it shouldn’t matter to him whether he joins the list of finance ministers who served their terms without new debts, next year or the year after.

After all, it is Mr. Schäuble who likes to point to 20th century Austrian-British philosopher Karl Popper’s politics of trial and error and sees the strength of democracy in being able to learn from mistakes. It’s about time the finance minister adopted this approach in his budget policy.

This article was translated by Bob Breen. Vincent Kuntz also contributed to this story. To contact the author: afhueppe@handelsblatt.com

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