Back in May, Greg Ip of the Wall Street Journal argued that Germany didn’t need to stimulate its economy through an increase in public investment as its economy was already growing at a decent clip, and unemployment was low.
I wasn’t convinced then, and I am still not convinced.
A stimulus is needed to reorient Germany’s economy away from exports, to keep private wage growth up and to open up space for Germany’s trade partners in the euro area to adjust without falling into a deflationary trap. Adjustment doesn’t happen magically.
There is solid evidence that Germany’s level of public investment is a bit too low for its long-term health.
And now there is also a growing cyclical case for a German stimulus. German growth is projected to slow significantly in 2017. Reuters reports:
"DIW ... lowered its 2017 growth forecast for Germany to 1.0 percent from 1.4 percent."
Other forecasts are a bit more optimistic, but all expect some slowdown in growth.
And the 2016 surplus is on track to top a percentage point of German GDP. In nominal terms, the surplus should exceed last years’s €30 billion surplus. Germany is clearly not fiscally constrained.
So rather than growing at 1% in 2017 and running a fiscal surplus of 1% of GDP, as now seems likely, Germany could choose to do a quick-hitting stimulus and likely pull growth up toward 2%. Some of those funds could support a rise in public investment that would likely raise future growth. And in the process of helping itself Germany would also help the world, as a fiscal expansion would help to bring down the world’s largest external surplus (China’s surplus has fallen a bit this year, Germany is poised to regain the top spot).
This really shouldn’t be hard.
It doesn’t require abandoning the schwarze Null (black zero), as Germany now needs to tax less or spend more if wants to be in fiscal balance.
It does require a deal within Germany’s governing grand coalition on the right split between spending and tax cuts ahead of next year’s election. The actual fiscal loosening in the current 2017 budget seems very modest; Citi recently estimated that it might reduce the structural fiscal surplus by about 0.1% of GDP. Not much, in other words.
Talk of tax cuts after the October German election isn’t enough; it doesn’t change the 2017 fiscal stance.