UNTIL recently, Germany’s policymakers were like the Japanese soldiers who spent years in the jungles of the Philippines, refusing to accept the reality that their country had lost World War 2.
In the case of Berlin, it was a case of the country stubbornly refusing to abandon six years of fiscal restraint, even though the German economy had entered recession before the onset of the coronavirus.
Covid-19 has changed everything: In response, Germany has boldly introduced measures totalling €1 trillion that in aggregate represents 30 per cent of its gross domestic product.
While the elimination of Berlin’s so-called “black zero” fiscal rule — a perverse insistence on a balanced budget — is to be welcomed, the fine print suggests that the direct spending component is paltry, relative to Germany’s European counterparts.
Over half of the package, €550 billion, is a state guarantee of corporate debt. There is a further €100 billion of equity injections. Ironically, one of the goals, according to Economic Affairs Minister Peter Altmaier, is to preclude a “bargain sale of German economic and industrial interests”, precisely the opposite of what was forced on the Greek government during its 2015 crisis, when in exchange for financial aid, Athens was pressured into a programme of wholesale privatisation of state assets at highly distressed levels.
On the other hand, the direct spending component is pretty low. Even allowing for the fact that Germany has a pre-existing programme of wage subsidies in place, the country is still only providing an additional €50 billion for small businesses and the self-employed.
By contrast, the French government is paying 84 per cent of any furloughed employees’ net salary up to €5,330 a month, while the Danish government is covering 75 to 90 per cent of all worker salaries over three months.
Also noteworthy is, many of Germany’s leading policymakers continue to self-righteously insist that the country’s years of fiscal restraint is precisely what is now allowing the country to spend aggressively. This is nonsensical.
The low levels of Germany’s national public debt have been offset by high levels of private debt, especially in the country’s rickety banking system.
German phobias about inflation can certainly be addressed if the balance of the government spending is focused on expanding the productive capacity of the economy to ensure that essential goods can continue to be provided absent price rationing (or inflation).
It speaks to the calamity of decades of bad policymaking that a global lockdown that potentially revives Great Depression levels of unemployment is now considered optimal policy to keep us safe and healthy.
That’s the legacy of austerity, of which Berlin was a leading proponent. The good news about Germany’s belated action is that it likely provides political cover for other eurozone nations to proceed with aggressive government spending packages.
Furthermore, the European Central Bank also has the scope to undertake comprehensive action to ensure that national solvency does not become an issue.
The bad news is that institutional constraints, such as the arbitrary limits on public debt and national budget deficits in the eurozone, continue to bias national policymaking towards austerity.
These must go. Simply constructing temporary loopholes on the basis of Covid-19 is not enough.
But attempts to ease those institutional constraints will likely run into legal opposition in Berlin.
Given these considerable challenges, it is hard to envisage the single-currency union surviving in its current form.
Governing by crisis is neither easy, nor effective, especially if one is not monetarily sovereign in one’s currency. The sooner all of Europe, especially Germany, recognises that fact, the better the future is likely to be for all.
The writer is a market analyst and commentator. This article was produced by Economy for All, a project of the Independent Media Institute
The views expressed in this article are the author’s own and do not necessarily reflect those of the New Straits Times