Merkel, Europe's Austerity Cop, May Need to Loosen Her Own Purse Strings

Merkel Photograph by Krisztian Bocsi/Bloomberg

Germany, Europe’s fiscal-discipline cop, is starting to have second thoughts about balancing its own budget. Chancellor Angela Merkel promised during her 2013 reelection campaign to forgo new public borrowing for the first time since 1969 in order to keep her government’s budget in perfect balance. Now, as slumping exports push Europe’s largest economy to the brink of recession, some of her countrymen are urging her to loosen the purse strings to stimulate growth.

The Social Democratic party (SPD), the junior partner in Merkel’s coalition government, wants her to to underpin demand by boosting spending on projects such as energy systems and broadband technology. “Germany has to invest significantly more in its infrastructure, Economy Minister Sigmar Gabriel of the SPD said in a statement on Tuesday. “For the economic dynamic, but above all for long-term growth and prosperity, investment plays a key role.”

“The decision to balance the budget is a risky one,” Marcel Fratzscher, head of the German Institute for Economic Research in Berlin, told the magazine Spiegel. The institute and three other leading think tanks warned the government in a report on Oct. 9 that Merkel’s policies are holding back growth. They predicted that the economy would expand by only 0.1 percent in the fourth quarter after shrinking 0.2 percent in the second quarter and remaining flat in the third. The German government on Tuesday cut its full-year growth forecast from 1.8 percent to 1.2 percent and said growth next year would be 1.3 percent, down from an earlier forecast 2 percent.

According to the think tanks, the government could borrow as much as €10 billion ($12.6 billion) next year to spur growth without violating a balanced-budget constitutional amendment that was adopted in 2009 and takes full effect in 2016. “That would send a strong message to the German business community and to Europe that Germany takes its responsibility seriously,” Fratzscher told Spiegel.

The International Monetary Fund and leaders of additional European countries also are urging Berlin to spend more. Germany “could afford to finance much-needed public investment in infrastructure primarily for maintenance and modernization, without violating fiscal rules,” the IMF said in a report on the global economy issued this month.

So far, though, Merkel and Finance Minister Wolfgang Schaeuble are sticking to their no-borrowing pledge while pressing other euro zone countries to get their finances in order. “We’re agreed in the German federal government that we must stay the course even in difficult times,” Schaeuble told reporters today at a meeting of euro zone finance ministers in Luxembourg.

Even some Merkel allies acknowledge that she may be forced to backtrack on the pledge if Germany’s economy falls into recession. SPD parliamentary deputy chairman Carsten Schneider told the Süddeutsche Zeitung newspaper today that, in case of recession, the government should prepare a supplemental spending plan that would rule out a balanced budget next year.

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