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The Plot to Scrap Germany’s Balanced Budgets Has Already Begun

The Plot to Scrap Germany's Balanced Budgets Has Already Begun

(Bloomberg) -- When Wolfgang Schaeuble stepped down in 2017, Europe’s much-feared austerity champion received a special gift: his staff at the finance ministry lined up as a big black zero in praise of his zeal for balanced budgets.

But today, Germany’s worship of fiscal discipline is being challenged by a looming recession and tantalizingly cheap credit -- and a silent revolution is under way at the 140-year-old institution to shed its economic dogma.

The Plot to Scrap Germany’s Balanced Budgets Has Already Begun

Leading the charge is Jakob von Weizsaecker, the chief economist who Finance Minister Olaf Scholz brought on board in January. Trained in economics and physics in France, the fellow Social Democrat is beginning to change the mindset of Germany’s financial technocrats.

His main task, he said in a message to finance ministry employees in February, was to raise awareness of a new reality in which interest rates will remain extremely low for a long time, potentially making previously unattractive investments feasible.

“Mentally we’re ill-prepared for a world in which savings and capital will be much less scarce than in the past,” von Weizsaecker, a distant relative of former German president Richard von Weizsaecker said in the February message. “Many public and private investments may pay off that previously didn’t.”

In the past months, the 49-year-old former European Union legislator has been spreading the word incessantly, organizing seminars and workshops, at which economic experts argue Germany must reassess its public finances and focus on investments, according to two people who participated in a few of them but didn’t want to be identified commenting on internal affairs.


Investment Slabs

For a German finance ministry official, von Weizsaecker is unusually outspoken on social media, tweeting the Bund’s negative yield curve or criticizing a conservative legislator’s financing proposals.

In one tweet he reacted to a newspaper article, describing what he thinks a government investment program ought to look like: focused rather than sprayed, slabs not dribbles, parceled not chaotic.

Scholz doesn’t publicly endorse his views and officially sticks to the black zero. But the silent revolution at the fortress-like finance ministry in downtown Berlin is a further indication that Europe’s largest economy is preparing for a u-turn on fiscal policy should the country be heading toward a deep recession.

The finance ministry declined to comment for this story.

Weizsaecker, who is given a free rein at the ministry, was recommended by Scholz aides and members of the SPD party, which had pushed for someone with a more Keynesian view to take the job.

For the 400 civil servants that formed the black zero two years ago, it’s nothing less than a mild revolution. For years Weizsaecker’s predecessor Ludger Schuknecht -- a close Schaeuble ally and financial hawk, lectured them regularly about the virtue of fiscal discipline as a means to secure investor trust and sustainable finances. In fact, under Schuknecht the finance ministry held seminars and invited experts to warn about the risk of low interest rates for financial markets.

Calls from the International Monetary Fund to loosen the federal government’s purse strings were ignored for years. The zero-deficit policy was enforced vigorously throughout the 14 ministries.

To be sure, fiscal discipline is not being abandoned altogether. In fact, Scholz last week warned of the potential trap that negative interest rates can be for debt dynamics. And Chancellor Angela Merkel’s Christian Democrats, for whom the zero-deficit policy is a point of honor that underscores German financial credibility worldwide, will certainly resist any attempts by the SPD, their junior coalition partners, in the budget debate that began in parliament on Tuesday to introduce deficit spending.

But as the economy slows and pressure at home and abroad grows for stimulus measures, the chorus for change is becoming louder.

"The German government would be well advised to consider useful stimulus measures like investing in infrastructure projects like roads, bridges and airports," Siemens CEO Joe Kaeser told reporters in Berlin on Monday night.

Germany’s trading partners see its policy as unnecessarily austere at a time when the euro-area economy is struggling. European Central Bank President Mario Draghi has repeatedly called on nations with “fiscal space” to use it, and the IMF has urged the government to invest in growth-enhancing infrastructure such as the digital network.

In criticizing the size of Germany’s current account surplus, President Donald Trump’s Treasury Department also said this year that Berlin should “take meaningful policy steps to unleash domestic investment and consumption.”

The economy contracted 0.1% in the second quarter and many major indicators are pointing south for the third quarter as well.

“The balanced budget shouldn’t be a dogma or an end in itself,” said SPD deputy caucus leader for finance, Lothar Binding. “Good government is not dependent on a balanced budget.”

Party Bid

Until recently such messages were drowned out by the fiscal hawks. But Scholz, who is bidding to co-chair his party and eager to engage government critics in his own rank and file, is showing growing signs he is at least mulling a change in policy down the line.

In recent weeks he has been stressing the need for Germany to make big investments, and replaced talk about a “balanced budget” with the more fluid concept of “solid finances.”

He even held out the possibility of a 50-billion euro ($55 billion) stimulus package in the case of a deep recession. In a letter to a legislator, deputy finance minister Bettina Hagedorn said that plans to run balanced budgets through 2023 could be reviewed if economic conditions change.

A key sign post will be a first estimate of third-quarter gross domestic product due on Nov. 14. Whether or not it shows the recession that could trigger deficit spending, Weizsaecker is working to ensure that the finance ministry is ready to act.

The next in-house seminar he’s planning is for Oct. 8, and he’s already tweeting invitations for experts to contribute.

--With assistance from Benedikt Kammel.

To contact the reporter on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Raymond Colitt, Chad Thomas

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