Editorial Board

Germany Can't Go It Alone Anymore

If the German economy keeps shrinking, the European Central Bank may finally be able to introduce a full-scale program of quantitative easing.
Friends in high places.

"We don't have a recession in Germany," said German Finance Minister Wolfgang Schaeuble in a widely quoted remark last week. It may not be true for much longer -- and while that would be bad news for Germany, it may be good news for the rest of Europe.

The German economy ministry has cut the country's growth forecast for the year to 1.2 percent, from 1.8 percent in April -- and if the German economy contracts in the third quarter, as it did in the second, Germany will be in recession. Then the European Central Bank may finally be able to introduce a full-scale program of quantitative easing.

Germany, the biggest economy in Europe, has always been the one to say no to ECB stimulus measures. Lasting memories of horrible hyperinflation in the 1920s mean the Bundesbank will always prioritize inflation over growth. With an unemployment rate that's declined to just 4.9 percent -- even as 11.5 percent of the euro zone is without work -- German complacency has been understandable, if not forgivable.

But the need for stimulus in Europe is now catching up to Germany, too. After all, an ebbing European tide risks sinking all boats; jobless people, wherever they are in the euro zone, can't afford new BMWs or Audis. Last week, the International Monetary Fund cut its 2015 growth prediction for the euro region to 1.3 percent. For this year, the agency sees the region eking out an expansion of just 0.8 percent, and even that may prove overly optimistic.

Exports, which account for 40 percent of Germany's economy, plunged by 5.8 percent in August, their biggest drop in five years. No wonder that the general European malaise has been spreading into Germany lately; investor confidence has fallen to its weakest in almost two years.

Germany has the fiscal space to do more to boost growth. Economy Minister Sigmar Gabriel, whose Social Democrat Party is the junior member of the governing coalition, called for an increase in infrastructure spending to counter the headwinds buffeting his plan to run a balanced budget next year, with no new net borrowing.

ECB President Mario Draghi has been dragging his fellow policy makers toward the kind of QE program that has reanimated both the U.S. and the U.K., but he's had to overcome German opposition every step of the way. (This week, the ECB is effectively on trial at the European Court of Justice after the German Constitutional Court declared Draghi's government bond-buying stimulus plans illegal.) Instead, the German government and the Bundesbank need to back Draghi's plan to pump as much as 1 trillion euros ($1.3 trillion) into the economy by making loans to banks and buying their debt.

"No country is immune," French Finance Minister Michel Sapin said earlier this month, commenting on the atrophy in Germany's economic figures. He's right: Germany is coming face to face with the reality that it's locked in a feedback cycle with its common-currency partners. If the German engine falters, growth in the rest of the bloc will deteriorate further, but now that Germany is starting to share their pain, perhaps it will wake up to the need to drop its dogmatic opposition to boosting growth.