Can Germans Get Over Their Allergy to Stimulus Before It’s Too Late?

(Bloomberg Businessweek) -- “Economic stimulus” is something of a dirty phrase in German policy circles. Since a splurge when the country reunified in 1990, the government has only once deliberately ramped up spending to revive growth. That was in the aftermath of the 2008 financial crisis, when Berlin unleashed a €50 billion ($56 billion) package that included subsidies for car buyers and support for companies struggling to make payroll.

Now pressure is building both at home and abroad for the famously frugal Germans to open the purse strings once more. After a drop in orders for cars and industrial equipment this summer, as well as a string of disappointing corporate earnings reports, the Bundesbank issued a warning on Aug. 19 that Europe’s largest economy could be about to tip into a technical recession (two consecutive quarters of negative growth).

Chancellor Angela Merkel’s coalition government is increasingly unpopular, which could make it difficult to muster political support for ending an almost eight-year run of balanced budgets. Along with giving Germany the moral high ground from which to lecture more profligate peers in the European Union, the country’s commitment to fiscal rectitude has allowed it to pare public debt to 60% of gross domestic product—the lowest of any major European economy—from 83% in 2010.

Speaking at a town hall event in the northern city of Stralsund on Aug. 13, Merkel acknowledged that the economy is sputtering, saying “we’re heading into a difficult phase,” and added that her administration will react “depending on the situation.” Finance Minister Olaf Scholz has said publicly that the government can muster a €50 billion stimulus again if needed. Discussions are already underway on what such a program might include, according to two people who asked not to be identified because the conversations are private.

“Considering that industrial weakness has now persisted for one and a half years, it is remarkable how slowly the debate has moved so far,” wrote Greg Fuzesi, an economist at JPMorgan Chase & Co., in a recent note to clients. Indeed, German officials have stuck with their 2019 growth forecast of 0.5% so far, even as economists at investment banks have been paring theirs.

The hurdles for getting a stimulus program approved are high. Under the constitution, the lower house of parliament must first declare a crisis if the government is to issue debt beyond the normal guidelines. Without a widespread sense of malaise, such a move could be difficult to justify.

Policymakers are reviewing the 2009 playbook to figure out which policies might be worth revisiting. It’s partly an issue of timing: Applying stimulus too soon could fuel imports and savings rather than bolster industrial output and protect jobs. Here’s a quick run-down of what’s possible, based on interviews with seasoned Germany watchers.

The country ranks highly overall in the World Economic Forum’s global competitiveness index but falls short in areas such as road quality and internet connectivity. To address those gaps, Berlin could commit to higher investment for the next 15 to 20 years, says Christian Odendahl, chief economist at the Centre for European Reform in Berlin.

Tax cuts are a key ingredient in almost any stimulus plan. Christian Schulz, an economist at Citigroup Inc., says Germany could follow the U.K.’s example of 2008 and temporarily trim its sales tax to give consumption a boost. Reducing income taxes, on the other hand, would backfire, according to Odendahl, because it would prompt federal, state, and local governments to curtail spending to offset the drop in revenue.

The government could revive a 2009 cash-for-clunkers program that offered consumers €2,500 rebates for replacing older cars with more fuel-efficient models. As well as aiding a key industry—one whacked by the diesel scandal and trade tensions—the initiative would dovetail with the country’s drive to accelerate the switch to more environmentally friendly energy sources. Also, authorities are already considering options such as incentives to improve the energy efficiency of homes.

Merkel’s administration could also choose to stand pat. The most recent budget sets aside more than €150 billion for infrastructure, education, housing, and digital technology over the next four years. Berenberg economist Florian Hense reckons that provides Europe’s largest economy with a boost equal to 0.4% of GDP, which he says should be enough for now. —With Piotr Skolimowski

To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Raymond ColittBen SillsCristina Lindblad

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