Why Germany’s Economic Slump Fuels Calls for Spending
(Bloomberg) -- Germany is the engine of Europe -- and it’s running on fumes. In the third quarter, the continent’s biggest economy narrowly avoided what would have been its first technical recession in almost seven years. Yet Germany’s export-dependent companies remain deeply exposed to fallout from rumbling trade disputes, and the critical auto industry is struggling with the shift to electric cars. The country is facing its worst manufacturing slump in a decade, raising pressure on the government to abandon its longstanding aversion to splashing the cash. Will Chancellor Angela Merkel loosen the purse strings to provide a shot in the arm -- and would it be enough?
1. Why is the economy in trouble?
Blame Donald Trump, at least partly. The U.S. president’s trade spats with China and the European Union have rattled German exporters, which already face tepid demand due to slowing global growth. Household names from Volkswagen AG to BASF SE and Continental AG have cut their forecasts, painting a bleak picture of the outlook. At the same time, a robust labor market -- with unemployment near a record low -- has helped offset industrial weakness and lifted wages, underpinning solid domestic demand. Gross domestic product data published Nov. 14 showed tepid 0.1% growth in the July-September period, following a 0.2% contraction in the second quarter, twice the original estimate.
2. Aren’t lots of countries worried about recession?
Yes, but Germany has particular challenges. Exports account for almost half of its GDP, and it sells more goods abroad than anyone except China and the U.S. That means it’s highly sensitive to the ups and downs of the global economy. The recent travails of the nation’s dominant auto sector have also weighed heavily. As well as dealing with the fallout from the diesel emissions-cheating scandal, carmakers and parts suppliers have struggled to manage the shift from the combustion engine to the electric motor. If Trump ever follows through with his threat to slap tariffs on European cars, it would deal a damaging blow to Germany’s auto sector.
3. How deep are Germany’s woes?
Most economists don’t expect a severe slump like the one following the financial crisis more than a decade ago. Financing conditions are favorable and domestic demand is holding up -- at least for now. Economy Minister Peter Altmaier said after the third-quarter GDP data that “the upwards trend has started but it’s proceeding very slowly,” while the Ifo institute’s closely watched gauge of business sentiment offered a glimmer of hope in October that the worst may be over. Substantial risks to the outlook do remain, including potential disruption from Britain’s planned exit from the EU and tensions in the Middle East. And if manufacturers respond to their slump with significant staffing cuts, that could start a snowball effect, with the resulting jump in unemployment crimping consumer spending.
4. Can the government stimulate the economy?
Since they opened the taps after reunification in 1990, Germany’s famously frugal policy makers have only once deliberately ramped up spending to revive growth. In response to the 2008 financial crisis, the government deployed a package of measures worth 50 billion euros ($55 billion) that included subsidies for car buyers and support for companies. Finance Minister Olaf Scholz has said that the same amount could be available again if needed. Germany is unable to effect its own monetary policy since it’s part of the euro currency bloc and beholden to the European Central Bank, so fiscal stimulus is its only independent option.
5. What has the government done so far?
Asked about the calls for stimulus, Scholz told Bloomberg that Germany could implement “timely and targeted” measures -- such as expanding support for unemployed people -- if confronted by a crisis. But he insisted that’s not the case now. Scholz has earlier cited the 600 billion euros of investment planned over the next decade and referenced the government’s climate package, tax cuts for low- and middle-income earners and spending on infrastructure, education and R&D to show that the government is not standing on the sidelines. But the federal government is only one part of the public sector. Some of the biggest investment gaps are at the regional and local level, where capacity bottlenecks are a serious issue. Planning offices are overburdened, and construction crews are already working overtime.
6. Why is Germany so wary of deficit spending?
The belief that living within your means is a necessary virtue is deeply ingrained in the German psyche. The nation is still haunted by the experience of hyperinflation in the 1920s, as well as postwar reconstruction and the price tag of reunification. The so-called “schwarze Null,” or “black zero,” that prohibits deficit spending is sacrosanct. Germany’s commitment to a balanced budget has allowed it to pare public debt to around 60% of gross domestic product -- the lowest of any major European economy -- from 83% in 2010.
7. What does this mean for the rest of Europe?
Germany’s fiscal discipline is meant to set an example for other countries. By sticking rigidly to EU spending constraints, so the thinking goes, Berlin is showing more profligate nations like Italy and Greece the benefits of self-control. But with borrowing essentially free, some economists argue that politicians in Berlin are squandering an opportunity to ramp up badly needed investment in transport and communications infrastructure. A deep recession in Germany would have ripple effects far beyond its borders, with many of its EU partners heavily dependent on selling their goods into Europe’s powerhouse economy.
8. What about the ECB?
The Frankfurt-based central bank’s loose monetary policy is designed to keep the euro-area economy ticking over. But despite his efforts to support growth, former ECB President Mario Draghi was portrayed by German tabloid media as a vampire sucking the blood from the nation’s savers. In one of the final acts of Draghi’s presidency, the ECB cut its negative rates deeper below zero on Sept. 12 and reactivated bond purchases. There is no sign of an end to the era of cheap money under his successor, Christine Lagarde. Bundesbank President Jens Weidmann, who represents Germany on the ECB’s governing council, is among policy makers who have openly opposed the central bank’s stimulus drive.
The Reference Shelf
- A Bloomberg QuickTake explainer on recessions.
- Bloomberg: Lagarde eyes a dozen euro members with room to spend more.
- Bloomberg: The ECB’s dream of German fiscal spending impact isn’t proven.
- Bloomberg: The plot to scrap Germany’s balanced budgets has already begun.
- In Bloomberg Opinion, Tyler Cowen writes in defense of German savers, and Melvyn Krauss says Germany should act its size.
- Financial Times: Rethinking Germany’s national ideology of balanced budgets.
©2019 Bloomberg L.P.