Crisis gives Germany sense of vindication for ‘black zero’

Bloomberg

Now Germany is deploying its financial firepower to fight the coronavirus crisis, convincing the country that it was wrong to shun budget deficits for many years just got even harder.
The government of Europe’s biggest economy has long faced calls by officials from the International Monetary Fund (IMF) and the European Central Bank (ECB), to the US administration of Donald Trump, that it should spend and borrow more. Its finance ministers, backed by voters, insisted that balanced budgets and low debt were prudent policies storing up ammunition for a crisis.
That scenario has now materialised with the coronavirus, and Chancellor Angela Merkel is using Germany’s ample fiscal space to aid the economy and contribute to the region’s $590 billion rescue package. The outcome is prompting some economists to ask whether the country got it right all along with its so-called “black zero” approach, avoiding deficits for much of the past decade.
“In its fiscal approach, Germany feels absolutely vindicated,” said Holger Schmieding, chief economist at Hamburg-based Berenberg Bank. “Now we have the worst hailstorm ever in peacetime, and we have the means to go against it — big time.”
That’s very much the message of Olaf Scholz, Germany’s Finance Minister, who is adamant that the current crisis shows the wisdom of the balanced budgets pursued by him and his predecessor, Wolfgang Schaeuble.
“When I said why it makes sense to reduce the public debt, it was always my argument: it is because there might be a crisis,” he told Bloomberg Television on March 25. “Now we have the strength, and we will use it.”
Such sentiments strike a chord across northern Europe, and not only with fellow euro members Austria and the Netherlands. In Switzerland, the visibly upbeat finance minister last month unveiled a $20.4 billion stimulus package with the preamble that, because the country had paid down debt for years, it could now afford to spend.
Marcel Fratzscher, chief economist of the DIW institute in Berlin and a former ECB official, maintains that Germany should indeed have spent more on its economy over the years, and that any sense of vindication is wholly misguided. Whether its debt is 50% or 70% of GDP  “makes no difference,” he said.
“I wouldn’t agree with the thesis that Germany can spend so much now, because in the past because they always stuck to a balanced budget,” he said. “Had they done more investments, Germany would have had exactly the same ability to react to the crisis as today.”
For German officials however, any sense of justification would be a long time coming. Years of striving to avoid deficits, and a constitutionally enshrined brake on debt, have earned the country a reputation as the miser of the industrialized world.
Bundesbank President Jens Weidmann, interviewed just before the crisis hit, hinted at how often he’s had to listen to criticism of Germany’s fiscal stance from counterparts, saying that “it’s a debate we have been used to hear for a while.”
Fiscal ‘Fetish’
The arguments range from those of Trump officials who say the country should spend more to reduce a trade surplus they deem to be excessive, to the IMF arguing for investment and tax cuts not only to correct current account imbalances, but also to foster its own growth potential. In a speech two years ago, French President Emmanuel Macron criticized German fiscal policies as a “perpetual fetish.”
“It’s the same old story: If structural questions aren’t solved, they won’t go away,” said Gertrude Tumpel-Gugerell, a former member of the ECB’s Executive Board. “The point of debt brakes is to say ‘there may be hard times when we need this fiscal room to maneuver.’ That’s been successful in some countries and less so in others.”
The ECB, whose public rhetoric prevents officials from specifying action from individual countries, has long craved a German stimulus. That’s not only in the hope that it would aid its own economy, but also that of the euro region as a whole, at a time when the institution’s own monetary tools became depleted.
What is true, now that European Union countries have pledged a package of measures to fight the impending recession, is that its ability to tap markets cheaply is a potential boon for its neighbors. With ECB interest rates at record lows, Chancellor Angela Merkel’s government can borrow money for virtually nothing.
“Countries like Germany and the Netherlands having this fiscal space now is good for all, because it provides a fiscal backup,” said Volker Wieland, a member of Germany’s Council of Economic Experts. “It keeps rates lower and helps other countries getting market access.”
However that argument progresses, there’s no question that, now a crisis has struck, German fiscal conservatives have a sense of vindication.
“Those who kept to the rules now have fiscal space,” Otmar Issing, a former ECB chief economist and Bundesbank official, told Bloomberg Television’s Guy Johnson in an interview. “Those who didn’t are now in special problems.”