The German word «Schuld» has two meanings: «debt» and «fault». This is something even those critics who do not know German (and often do not know much about Germany either) have learned, Stefan Schneider writes in his essay on finews.first
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Recently, Anglo-Saxon investors tend to shake their heads at those behind-the-times German economists who still refuse to believe that Germany should urgently put together a huge fiscal stimulus package. Particularly if said economists (for example, we at Deutsche Bank) were among the first to sound the alarm about a potential recession back at the beginning of this year. By now, the German government, the Bundesbank and some research institutions also expect at least a technical recession, i.e. another GDP contraction in Q3 following a decline of -0.1 percent in Q2.
Against this background, the ECB, the IMF and the Eurogroup ministers of finance are wondering what on earth the German government is waiting for. U.S. Nobel Prize winner Paul Krugman even believes that Germany’s «fiscal obstinacy» is one of the main reasons behind the woes of the global economy. With Germany contributing only 3.2 percent to global GDP (on a PPP basis), this view appears a bit exaggerated, though.
«This means that the output gap has been positive for the longest continuous period in 50 years»
While German economics minister Peter Altmaier is against old-school stimulus packages, he wants to avoid a recession at any cost. In fact, he has called preventing a recession the essence of «statesmanship». Quite rightly, he has pointed out that Germany has been enjoying a (remarkably long) ten-year expansion, which he would like to extend further.
Business cycle theory tells us that an upswing becomes a boom when the current rate of growth exceeds the trend rate and the capacity underutilization of the preceding downswing is overcome (positive output gap). The IMF, the OECD, and the Bundesbank all agree that this has been the case in Germany since 2014. This means that the output gap has been positive for the longest continuous period in 50 years. Only the reunification boom, which started back in 1988, can compare.
Similar to the belief in a perpetual motion machine in physics (which runs counter to the first law of thermodynamics), a number of policymakers and economists believe that smart policies (or «statesmanship») can lead to a perpetual expansion and the elimination of the downswing part of the economic cycle. Given the declining trend growth, these downswings will actually become more likely to result in negative growth rates.
«Surely policymakers and their economic advisers have become much cleverer in the meantime, have they not?»
In fact, German economics minister Karl Schiller implemented what he called «macroeconomic steering» (Globalsteuerung) in the 1960s to prevent recessions by fine-tuning the economic cycle. However, macroeconomic steering did not have the desired effect. Instead, it led to the stagflation of the 1970s and 1980s, i.e. the worst of all worlds, in which unemployment, inflation, and government debt rose strongly.
Surely policymakers and their economic advisers have become much cleverer in the meantime, have they not? And their success in preventing economic Armageddon after the global economic and financial crisis has shown that countercyclical policies work, has it not? The coordinated global monetary and fiscal policy response in 2009/2010 was certainly both necessary and effective. Global trade had collapsed around the turn of the year 2008/09 and shrunk by roughly 15 percent within only three months. The global equity price slide pointed to a massive loss of confidence, and government demand successfully offset the collapse in private-sector demand, exactly as doctor Keynes had prescribed.
«They believe that the homonym aptly describes the German obsession with debt»
However, many governments missed their exit cue after the imminent crisis was over. Global government debt has risen by 23.5 pp since Q3 2008, despite having receded by close to 7 pp during the last three years. Global indebtedness of the non-financial sector has even climbed by 36 pp, from 197.7 percent of GDP in Q3 2008 to 233.7 percent lately – not least due to persistently low key interest rates. The U.S., from where the loudest calls for German «deficit spending» are emerging, have engaged in a veritable debt orgy. According to CBO estimates, government debt will reach the threshold of $1 trillion (!) in FY 2020. Absent legal changes, debt will rise by 15 pp of GDP during the coming ten years, and if things go badly, by as much as 27 pp.
The German word «Schuld» has two meanings: «debt» and «fault». This is something even those critics who do not know German (and often do not know much about Germany either) have learned. They believe that the homonym aptly describes the German obsession with debt.
«This illustrates quite well that a stimulus package is currently unnecessary»
In fact, they argue that this collective paranoia has some masochistic characteristics. After all, the government might make use of negative interest rates to raise capital on the market and fund growth-supporting investments in education and infrastructure, which came practically for free as they induce higher GDP growth in the future. Besides private-sector investment, better general education and a modern infrastructure are doubtless important preconditions for sustainable growth. And Germany certainly could do better in this regard, even though the picture of a «crumbling infrastructure», as Professor Krugman writes in his remote analysis, is certainly exaggerated.
The true art is not to satisfy short-term political interests by simply providing indiscriminate subsidies or make investments that turn out to be useless later on. Against the background of massive structural change, the key challenge is to identify those investments that really support potential future growth and avoid making election gifts and engaging in political patronage.
This illustrates quite well that a stimulus package is currently unnecessary; indeed, it would be tantamount to a waste of tax money. Rather, the government should continue to increase investment in education and infrastructure steadily and complement these efforts with a prudent policy to promote Germany as a business location. This would really help to prop up growth in the long run.
Stefan Schneider is the Chief German Economist at Deutsche Bank.
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