For years, Germany’s government has resisted calls to end its ideological attachment to thrift and do more to support domestic demand. At last, there are signs that the eurozone’s largest economy is rebalancing: growth in exports has slackened and consumer spending is rising at the fastest rate in almost 20 years. This is a welcome development, yet the domestic upswing owes little to government policy. There is far more Berlin could do to boost demand — to the mutual benefit of the eurozone and its own voters.
Consumers have considerable inducement to head out shopping. After decades of pay restraint, in which earnings increased at a far slower pace than productivity, workers are now enjoying wage growth above inflation (although union negotiators could still be more ambitious in areas of high employment). The fall in oil prices has helped household budgets. People do not need to dig into their savings in order to spend more. Employment has been rising, with the number of people in work the highest since reunification — and this has lifted consumer confidence, according to a recent survey, to its highest level since 2001.
There has also been a modest boost from fiscal policy. Although finance minister Wolfgang Schäuble remains intent on running a balanced budget
, rising tax revenues have made this commitment to the “black zero” compatible with higher refugee-related spending, an increase in social transfers and modest tax cuts.
However, Germany’s consumption boom owes far more to the stimulus delivered by the European Central Bank than it does to domestic policy. German savers may decry the ECB’s policy of negative interest rates, but a dislike of eurozone monetary policy does not stop people taking advantage of cheap mortgage rates. House prices are rising, as is associated spending on furniture and durable goods.
German politicians have also been loath to recognise the degree to which their pursuit of fiscal prudence has been aided by the ECB’s action to drive down the cost of public borrowing. Rather than carping at the ECB, they would do
better to use the fiscal space the central bank has helped to create.
Mr Schäuble has taken a step in this direction, saying he sees scope for some €15bn of tax cuts, aimed at people on low and middle incomes, after next autumn’s elections.
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This seems a strange inversion of the pressure most governments feel to cut taxes in the run-up to elections, and tighten the purse-strings afterwards. Both German politicians and the German public believe in the need to practise the austerity that has been imposed on the EU’s indebted periphery. Yet other than the self-imposed constraint of running a surplus, there is little reason to delay a fiscal stimulus. It is true that German voters do not always support tax cuts — but it is hard to imagine them opposing a drive to invest in public infrastructure.
Again, the government has already taken some steps in this direction, publishing plans for long-term investment in transport infrastructure. But it has not committed funds. This is short-sighted. Despite media reports of crumbling bridges and ageing railways, German infrastructure remains a huge national strength, but it will remain so only if the money is made available to maintain it. Moreover, there are other areas in which Germany risks falling behind — it is lagging, for example, in internet connection speed and other aspects of digital infrastructure.
A well-directed fiscal stimulus would not only aid the eurozone recovery: more important, it would be in Germany’s best interests.