(Bloomberg Opinion) -- Two cheers for Germany. Finally, after years of pretty much the whole world berating Europe’s largest economy for being wilfully stingy with its public purse, the government has thrown away its fiscal water pistol and pulled out the bazooka. It’s too bad it took a pandemic to get to this point. But better late than never.
Today the cabinet of Chancellor Angela Merkel, herself in quarantine after exposure to an infected doctor, announced additional government borrowing of up to 350 billion euros ($376 billion). Some 150 billion euros of that will go to a much larger federal budget this year, the rest to a new rescue fund. The package, which comes on top of hundreds of billions already promised in loan guarantees and other measures, will be rushed through both houses of parliament by Friday.
With this step, Germany is at last joining the world’s other large economies in fighting a vast crisis with vast tools. But Germany found it much harder to take that step. That’s because the Merkel government has long hitched its own credibility with German voters to a balanced budget policy dubbed the “black zero,” which insists on tax receipts covering fiscal spending.
That policy was the consequence of a constitutional amendment passed in 2009. Inspired by the financial crash and called the “debt brake,” it sharply limits government borrowing, except for use in unforeseen emergencies.
For years, an international consensus stretching from Washington to Paris, Rome and Brussels has railed against this German debt brake. Germany badly needs the public investment to fix its creaking infrastructure, the argument began. It’s also the only big economy in the euro area with the fiscal capacity to stimulate the stagnant continent, the black-zero critics added.
Last year, even many German economists came around to that “Anglo-Saxon” view. So did politicians on the center-left, from the Greens in opposition to the Social Democrats in Merkel’s governing coalition.
But Merkel’s own conservatives dug in. Even now, they claim that their debt brake, far from being part of the problem, reveals itself as the solution. If Germany, unlike Italy for example, is now able to spend whatever it takes, that’s only thanks to the country’s prudent fiscal management all these years. And the black-zero rule, with its clause allowing exceptions during catastrophic emergencies, was always flexible enough, even for a pandemic.
Perhaps. But what this German reasoning continues to overlook is Germany’s special role within the euro area. Even now, the country’s response is purely national in character, and directed at the expected domestic economic fallout, which a Munich-based think tank estimates at between 255 billion euros and 729 billion euros, equivalent to output shrinking by between 7.2% and 20.6%.
Germany should instead be thinking of itself as the largest part of an even bigger economy, the euro area’s. What German policymakers including Merkel still haven’t understood is that Germany is in effect the currency union’s “hegemon,” or economic guardian. To preserve that union, Germany should be leading a European rather than a national response, if not during the pandemic then at least right after.
This would require setting up some form of euro-area treasury, akin to America’s, and levying new euro-area taxes that would repay future bonds issued by the euro area as a whole, analogous to U.S. government bonds. The region would then be able to raise debt at lower rates than individual members like Italy can. The money would be disbursed where it’s needed most.
Of course, it’s unreasonable to imagine that the euro area can simply click its fingers and complete such a fiscal union — controversial even in good times — in the throes of a global medical emergency. By definition, the process will require trade-offs, additional constraints on national budgets and therefore more political integration. For now, as the euro area’s 19 members are fighting individually for their citizens’ lives, that virus-containment effort must remain the priority.
But as Europe’s countries, including Germany, struggle to save their national economies from the worst, they should also mentally prepare for the day the virus abates, this year or next. Even if the European Central Bank staves off another sovereign debt crisis, the euro countries will come out of the pandemic with very different levels of debt, just when they need to restart their economies.
So let’s give Germany those two cheers for getting started. But let’s withhold the third cheer for the time when Berlin, finally, goes that extra step and accepts its role as the economic leader of a currency union, a union that must be completed if it’s to survive not just this pandemic, but the next crisis too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andreas Kluth is a member of Bloomberg's editorial board. He was previously editor in chief of Handelsblatt Global and a writer for the Economist.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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