In the face of weakening economic growth, outgoing European Central Bank president Mario Draghi has called on the fiscally conservative governments of Germany and the Netherlands to spend more.
The Dutch are heeding his advice with plans for a long-term economic investment fund. Will the Germans follow suit?
Wait and see
Germany remains reluctant to borrow, for two reasons:
- Its debt as a share of economic output stands at almost 60 percent, well above the Netherlands’ 50 percent.
- Although factory output is down, consumer confidence and business morale have improved in recent months. A deeper slump is not expected at the moment.
But neither is a turnaround. The Germans are taking a “wait and see” approach. If the economy gets worse, Finance Minister Olaf Scholz has vowed to loosen the purse strings.
Another factor is pressure to do more about climate change. Chancellor Angela Merkel has unveiled a €54 billion spending package to reduce emissions without breaking Germany’s balanced budget rule.
Indeed, borrowing is not the only way to finance long-term investments. With this package, companies that use or trade in fossil fuels will have to pay a carbon price starting at €10 per metric ton in 2021 — far below the EU price, which reached €28 this summer.
Perhaps there is no immediate need for stimulus. Perhaps the Germans are right and the ECB is overreacting.
What complicates the question is the German stigmatization of deficit spending.
Germans blamed reckless government spending in countries like Greece and Italy for the euro crisis. They weren’t wrong — but they overlearned the lesson. There is a difference between borrowing money to fund generous pensions and borrowing money to invest in infrastructure.
Germany’s infrastructure, both digital and physical, notoriously lags behind the rest of Western Europe’s. If an economic slowdown is coming, and Germany can continue to borrow at interest rates close to zero, it has an opportunity now to prepare for the storm.
The Dutch are tending to agree. The Germans might learn a bit from that famous Dutch pragmatism.