Germany’s discipline comes at a high cost

Posted on September 4, 2016

German finance minister Wolfgang Schauble©EPA

German finance minister Wolfgang Schauble

News that Germany’s government racked up a bigger-than-expected budget surplus in the first half of 2016 — at €18bn, it amounts to some 1.2 per cent of national income — has been met by the expected international harrumphs from those who think Berlin could do more to power the eurozone and global recovery. But it is Germans who should really object the loudest.

The budget surplus marks another victory in finance minister Wolfgang Schäuble’s fetishistic pursuit of the “black zero” in public finances. The black €18bn, which it has turned out to be, is not entirely due to policy — indeed refugee-related spending has risen fast — as it owes quite a bit to the good performance of the German economy and ever-falling interest rates.

    That does not detract from the symbolic satisfaction many German policymakers feel from setting an example of the sort of budget discipline they think should also govern other eurozone countries. The symbolism does, however, comes at a high cost — for Germany.

    The government’s surplus adds to the larger private sector surplus which means the nation as a whole consumes much less than it produces, sending the excess abroad in return for increasing financial claims on the rest of the world. German policymakers like to say that the country’s enormous trade surplus is a result of economic fundamentals, not policy — but as far as the budget goes, that claim is untenable.

    Even if much of the external surplus were beyond the ability of policy to influence, that would be a case to use the government budget to counteract it, not reinforce it. For the dirty secret about all those foreign assets Germany is accumulating through consecutive surpluses is that they are awful investments. German savers who grumble about low interest rates on bank accounts should take as dim a view on the largely non-existing returns on all the capital their nation is lending abroad.

    All the more so as there are gaping needs to spend more at home. An ageing economy with large looming pension liabilities needs much faster productivity growth. That, in turn, will require a higher rate of investment: in public infrastructure, private productive capital and, importantly, human capital, especially among the poorest and least-skilled part of the workforce.

    That would be a better use of public funds than to reduce debt investors are paying the government to take on.

    martin.sandbu@ft.com

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