Germany’s Surplus Obsession Hurts the Eurozone

There are things Germany can do to boost its own economy as well as those of its neighbors.

Angela Merkel
German chancellor Angela Merkel attends the G7 summit in Biarritz, France, August 25, 2019 (Bundesregierung)

If the German economy does poorly, so will the eurozone’s. A mere .2 percent growth is projected for the first quarter of 2020. This should be a wakeup call to German policymakers.

There are the usual suspects: underdeveloped infrastructure, underinvestment in education, export dependency.

They all stem from Germany’s obsession with surpluses. Revenues generated by exports are not reinjected into the economy. Rather, they sit comfortably in savings accounts. This is the reason for negative interest rates.

Not spending money is one way to get rich. But to grow its economy, or prevent a slowdown, Germany must put its money to work: invest in education, infrastructure and public goods.

Its reluctance to do so affects everyone in the euro area. Germany accounts for nearly 30 percent of the eurozone’s GDP. If Germany spent more at home, it would reduce its current account surplus and increase demand for the products and services of other European nations.

Fiscal policy

Monetary policy can only do so much to mend the imbalance. Although the European Central Bank lends money cheaply to banks, this is not finding its way to consumers. The ECB could create dual interest rates: one for loans and one for deposits. But this would take time and require a consensus from central bankers.

What is needed is a change in fiscal policy.

Fiscal union, in which a eurozone finance ministry would tax and spend across the nineteen countries that use the euro, is one idea. The French support it. The Dutch, the Germans and other wealthy and frugal nations in the north of Europe fear it would simply mean more of their money being spent in poorer countries.

Zero-sum

The Germans insist they shouldn’t have to sacrifice competitiveness for the sake of growth elsewhere, but that presents a false, zero-sum choice. There are things Germany can do that would benefit itself and others.

It could exempt green investments from its balanced budget rule. That could spur innovation in Germany and create more demand for eco-friendly and sustainable products and services from other eurozone nations. Not to mention reduce emissions.

It could raise wages. That would give Germans more money to spend on both German- and European-made goods.

Populism

The debate is not purely economic. Growth is an antidote to populism. When Germany is seen as selfishly holding the economies of Europe back, it fuels support for anti-establishment parties in low-growth countries, and it casts doubt on the promises of European unification.

By spending, Germany could enhance its image as a team player and revive confidence in the eurozone experiment.


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