It’s Time for German Fiscal Expansion
The United States has made some bad fiscal choices, in particular by cutting taxes for the rich at the peak of the business cycle. German policymakers should not make the symmetric mistake of preserving the country’s budget surplus as the economy risks sliding into recession.
CAMBRIDGE – As long as Germany’s economy was recovering well from the 2008 global financial crisis, policymakers had a coherent rationale for fiscal austerity. Rejecting other eurozone countries’ constant urging that they undertake stimulus, they enshrined the national commitment to budget discipline in the 2009 “debt brake,” which limits the federal structural deficit to 0.35% of GDP, and in the subsequent schwarze Null (“black zero”) policy of fully balancing the budget.
More German public spending, stimulus advocates argued, would reduce the country’s huge current-account surplus and fuel demand that would help other eurozone members, especially in southern Europe. But with Germany experiencing low unemployment and relatively strong growth, policymakers in Berlin were understandably afraid that such measures would cause the domestic economy to overheat.
Today, however, overheating is no longer the concern. German GDP growth turned negative in the second quarter, reflecting weakness in the trade-sensitive manufacturing sector. And if third-quarter growth also turns out to have been negative, the economy will officially be in recession.