Has the scrooge of Europe finally learned its lesson?
Germany may be about to loosen its famous commitment to budget discipline.
A looming deal between German Chancellor Angela Merkel's Christian Democratic Union and the Social Democrats promises to spend more money on everything from child allowances, to pensions, to tax credits for homebuyers. Fiscal hawks are already crying foul, claiming there's no clear way to pay for these commitments.
Good. Contrary to popular belief, national budget surpluses are quite often stupid and unnecessary. In fact, Germany's much ballyhooed fiscal discipline is likely dragging down the whole eurozone economy.
First off, a little table setting. Germany's cultural commitment to frugality definitely applies to its private sector. German individuals and businesses collectively spend a good deal less than the income they bring in. And it's been that way for a while.
When it comes to the government's budget, however, Germany's commitment to frugality has been one of rhetoric a lot longer than practice. The German government briefly achieved a balanced budget in 2000, and then again in 2007, and finally again in 2012. In between, Germany's budget deficits expanded to as much as 4 percent of GDP, putting them right in line with (or even worse than) other major eurozone economies. Only since 2012 has the German government moved into sustained budget surpluses.
Most American politicians would describe that as a huge win — evidence that we're globally competitive, etc. It's much the same in European and German politics. But this near-universal political wisdom is complicated by a very simple fact: Not every country can run a trade surplus at the same time. If one country has a trade surplus, then another country by definition must have a trade deficit.
Why does that matter? Well, trade deficits mean that a portion of the demand from a country's own consumers is going to create jobs and wages in other countries rather than at home. You could make up the demand with private sector borrowing. But that can have obvious downsides. (See: the Great Recession.) The other, much more sustainable option, is for government deficits to boost demand. For a country that's struggling to create jobs for its citizens and raise wages, either trade surpluses or government deficits are needed.
This is a very important point when you consider the context for Germany's decision.
To put it very mildly, some of Germany's eurozone neighbors have been struggling mightily with depressed economies. Greece's GDP, for instance, collapsed after the 2008 crisis and has stagnated since. It's been enduring Great Depression-levels of unemployment for years. Other countries in the eurozone, such as Spain and Italy, were walloped as well.
Any country caught in Greece's circumstance ought to run the biggest trade surpluses it possibly can, because pulling in demand from elsewhere will boost jobs and wages. But that would obviously require other countries to make up the difference with trade deficits.
Of course, Germany isn't Greece's only trading partner. Nor is the eurozone a closed system. But the fact is, Germany's mammoth trade surplus makes Greece's task considerably harder. Despite being in economic crisis since 2008, Greece only achieved a balance of trade around 2014, and has barely maintained it since. Greece is certainly nowhere near the kind of sustained trade surpluses it needs.
Greece's only other option to boost demand is to run its own big government budget deficits. But Germany more or less runs the show among eurozone officials, and believes very strongly in applying its own (nominal) commitment to frugality on everyone else. The eurozone has forced stringent tight money policies and brutal fiscal austerity on Greece as a price for its bailouts.
In short, Germany's austerity obsession and its trade surpluses have screwed Greece twice over.
This brings us back to the future of Germany's own government budget. The country may be praised in the international economic press as the big success story of the eurozone. But despite the demand boost from its trade surplus, Germany's own domestic austerity has been a considerable economic drag. "Over the last 20 years, Germany has grown very slowly," J.W. Mason, an economics professor at John Jay College and a fellow at the Roosevelt Institute, explained to The Week. "From the point of view of the median German household or worker, you might not have gotten a raise in 15 years."
If Germany's private sector and its government are running surpluses, they're both drawing demand out of the economy. Bringing in demand from other countries, through trade surpluses, is the only way to make up the shortfall. Those things all necessitate each other as a matter of national accounting. Mason also pointed out that slow income growth for Germans also means less money to buy imports. Meanwhile, other countries in the eurozone saw faster income growth leading up to the 2008 crisis, which naturally led them to buy more exports from Germany. "The German trade surpluses have nothing to do with competitiveness or labor costs or productivity," Mason said.
In other words, Germany could really help Greece out by buying a lot more imports and, if not shifting into a trade deficit, at least balancing its trade. Probably the best way to do that is through big German budget deficits: Pump more money into the economy and raise German incomes. That would replace the trade surplus as the main supplier of demand to the German economy, and would drive a lot more import buying.
Not to mention, more budget deficits from Germany would also make the austerity fixation of eurozone officials a lot harder to maintain.
Now, it's not clear yet that Germany will embrace budget deficits. Or how big those deficits would be. But fiscal hawks in the country do seem freaked out. “I can't see how all the plans they've listed will be financed,” said Kay Scheller, the head of the Federal Audit Office, a German budget watchdog.
For the sake of Greece and the other eurozone economies, let's hope their worries are justified.