“TRULY A GREAT achievement…real triumph!” Thus did Olaf Scholz, Germany’s finance minister, this week hailed the imminent dip in his country’s public debt to below 60% of GDP, the limit set by euro-zone rules. Mr Scholz was unveiling his budget for 2019, the sixth consecutive year in which Germany will meet its “black zero” preference of no net borrowing. Building strong fiscal buffers, he boasted, prepares Germany for financial storms that may be brewing elsewhere.
The Teutonic obsession with fiscal probity grates in parts of Europe. But beyond the protection they provide, surpluses help oil the rusting wheels of Germany’s coalition politics. Mr Scholz’s Social Democratic Party (SPD), sinking in the opinion polls, is unhappy about its junior role in Germany’s government. But it was surprisingly constructive during budget talks. The coalition deal it signed last year with Angela Merkel’s Christian Democratic Union (CDU) contains a long wishlist of spending priorities. In exchange for such prizes as a system of pension guarantees until 2025, the SPD even overcame its traditional resistance to spending more on defence.
But what happens when the good times end? Germany’s economy contracted by 0.2% in the third quarter of this year. That was largely because new emissions standards for carmakers temporarily slowed production; most analysts expect a robust rebound in the last quarter. Yet amid the uncertainties of Donald Trump’s protectionism, Italy’s rogue government and Brexit, forecasts for German growth next year are steadily being cut to something closer to 1.5%. That would hardly mean a fiscal crunch, but it will limit the finance ministry’s ability to hand out sweeteners.
Meanwhile, the contest to succeed Mrs Merkel as head of the CDU, which comes to a head in early December, could cause wider political ruptures, including the collapse of the current coalition. Talks on forming a new government will be harder with less cash to splash around.
The role of windfall revenues in keeping government going should not be exaggerated, says Jeromin Zettelmeyer, a former official in Germany’s economy ministry now based at the Peterson Institute for International Economics in Washington, DC. For years, governments have feared that Germany’s boom may be nearing its end. They have moderated their promises accordingly.
The problem with Germany’s success, notes Mr Zettelmeyer, is that it has allowed governments to avoid tackling structural inefficiencies. Germany’s recent boom has been in part the product of good luck, says Christian Odendahl at the Centre for European Reform: strong global demand for its exports, a weak euro and low interest rates. But it has not exploited the opportunity to introduce more competition to its protected service sector, improve its woeful record on digitisation or reform taxes, let alone rebalance its economy away from exports. Like the euro-zone countries it likes to lecture, Germany seems to reform only under pressure.
Rather than back more reform, Germany’s coalition politicians now seem keener to differentiate themselves from their rivals. The SPDtalks of scrapping Germany’s “Hartz IV” reforms, passed in 2003 by an SPD-led government and credited with keeping unemployment down ever since. It has also proposed locking in expensive pension guarantees until 2040. For its part the CDU wants to axe the “solidarity” charge, introduced in the 1990s to help the ex-communist east. Such proposals, often uncosted, contribute to a sense of a government without direction. Little wonder voters are tuning out.