European identity crisis A Balanced Budget's Unbalancing Effect

German Finance Minister Wolfgang Schäuble's insistence that balancing the books will solve Europe's problems is deepening divisions in monetary union.
Schäuble's focus on cutting debt puts him at odds with other countries in Europe.

Wolfgang Schäuble is a committed European and was honored for his dedication to European ideals with the St. Ulrich prize last Friday.

Nevertheless, when the German finance minister sees a budget deficit of zero as not only a decisive local advantage for the German economy, but also tries to convince voters that his budgetary philosophy is the silver bullet for Europe’s crisis, it seems a bit like he has tunnel vision.

Germany is currently in excellent economic shape. But that's no thanks to the current government or its fiscal policy, which is fixated on deficit reduction. The country is still benefiting from the reforms of the SPD-Green Party government under Gerhard Schröder, specifically the tax reforms of 2000 and especially the Agenda 2010 reforms of the social welfare system. Furthermore, Germany has massively benefited from globalization, in large part due to the favorable euro exchange rate.

In addition, we are currently in a demographic pause, meaning that the aging of the population has temporarily plateaued. Together, this all creates a situation that's admired around the world: record employment figures, high tax revenues, full social coffers and regular wage increases.

Global growth is weak, the vigor of world trade has declined significantly, parts of the infrastructure are getting old and soon the population will enter a strong, long-lasting aging phase. Meanwhile, Brexit will have undeniable negative consequences for all of Europe.

But Mr. Schäuble's fixation on a balanced budget ignores the fact that this winning streak is likely to soon come to an end.

Global growth is weak, the vigor of world trade has declined significantly, parts of the infrastructure are getting old and soon the population will enter a  strong, long-lasting aging phase. Meanwhile, Brexit will have undeniable negative consequences for all of Europe. At the very least, Germany needs to engage in “qualitative consolidation,” something that international organizations and academic institutions have been long been calling for.

Growth-stimulating expenditures such as the expansion of the country’s digital infrastructure and for education should be ramped up, government consumption expenses should be reduced and the tax system should be made more performance-friendly. This would unharness new growth, primarily through private investment.

These measures have been neglected, however, despite the fact that as a result of the European Central Bank’s policies, the interest payments have been €100 billion lower than planned since 2008. So the current balanced budget may not be the optimal fiscal strategy for Germany in terms of growth.

Mr. Schäuble is also overlooking the fact that Europe growing closer together was only possible because of the cooperation between Germany and France as equal partners. The Germany-France alliance has been successful in recent decades, though difficult because of their different political styles.

In Germany and Northern Europe there’s a love of fixed rules, such as convergence criteria, with stability pacts armed with automatic sanctions and debt brakes. This tendency is based on a mistrust of policy that makes decisions on a case-by-case basis and or based on concrete situations. To put it simply, the instinct is to try to block democratic ad-hoc decisions with such rules in the interest of the perceived “correct” decision.

Yet fixed rules are contrary to the traditions of French and British policy, not to mention those in southern European countries. There the primacy of politics has more weight than the execution of what is deemed economically correct or what is “objectively appropriate,” especially since there is no real evidence of the consistent superiority of the rule-based policy.

With the departure of the United Kingdom from the European Union, Germany is definitively the dominant economic power on the Continent. This could make it more likely that Berlin could impose its policy style on neighboring countries. But the unassailable value of a balanced budget is not clear to the political leaders in southern Europe and their advisers, who are even less committed to the neo-classical paradigm and certainly not to the German regulatory policy approach, especially not in times when almost no interest can be charged on government bonds.

Every deepening of the European Union has thus far required a compromise between German rule orientation and French panache.

Insisting on strict compliance with German fiscal principles may bring with it the risk of the European Union growing further apart rather than closer together.

Rather than being the person who brings the monetary union to its full fruition, Mr. Schäuble is in danger of going down in history as the euro's gravedigger .

 

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