economy germany

Germany’s ‘Black Zero’ Fiscal Policy Called ‘Voodoo’ As Economy Screams For Stimulus

"We have a policy, that is not in question".

“The chancellor has never left any room for doubt about the fact that she stands by the goal of a balanced budget”, Angela Merkel’s spokesman, Steffen Seibert, said in Berlin on Monday.

“We have a policy, that is not in question, that we had balanced budgets in past years and that we continue to strive for”, he added.

Seibert was responding to a rumor mill that’s alive with speculation about a possible fiscal U-turn in Germany since reports suggested last week that Berlin might loosen up the proverbial purse strings in order to finance a climate protection package.

Read more: ‘Boom!’: Did Germany Just Change The Game With Long-Awaited Fiscal U-Turn?

As noted at the time, it was probably a bit premature for anyone to get their hopes up given Germany’s affinity for fiscal rectitude.

Still, the mere discussion of a serious fiscal push to support Germany’s flagging economy would represent movement on a previously intractable logjam that’s bedeviled those calling for more government spending to help take some of the onus off monetary policy when it comes to reviving growth and inflation in the bloc. “There is a debate on the rationale for a strict zero budget rule in Germany [and] even if [it’s been] fruitless so far, at least a rule that has not made much economic sense since its start is now discussed, even if actual change might still be a long way off”, BofA wrote Friday.

On Monday, Robert Habeck, head of Germany’s ascendant Greens party, told Deutschlandfunk radio that “the insistence on the ‘black zero’ is voodoo fiscal policy”. He proceeded to implore CDU to get over their obsession with a balanced budget and finance public spending with debt. “We’ll need massive investments in climate protection”, he said.

AKK isn’t having it. “I think it would be wrong if we now said that we put aside the principle of the ‘black zero’”, Kramp-Karrenbauer, Merkel’s heir, and now defense minister, said over the weekend.

To be sure, CDU/CSU is going to need the Greens considering SPD’s fall from grace, and one look at the dramatic plunge in German yields and various gauges of factory activity and sentiment is all you need to understand why calls for fiscal stimulus are growing (much) louder.

As noted above, this is especially critical for Europe given ostensible constraints on how much more can be accomplished with monetary policy.

BofA is still highly skeptical. “Remember, the law says that the federal government is to abide by a zero budget rule, with room for cyclical adjusted deficits of 0.35% of GDP [and while] extraordinary events allow a more significant deviation, that must be accompanied immediately by a pay-back plan”, the bank wrote, in the same note mentioned above. For the bank, that pretty clearly suggests there’s not much room for a significant change to fiscal policy, something they call “an abstract notion”.

But with the yuan devaluation, Berlin might want to consider making a bit less “abstract”, because according to BofA’s calculations, “a 1% CNY depreciation would lower German exports to China by c 0.5% within 1.5 years”. Last week, the bank revised their forecasts for the yuan and when you incorporate those revisions into their model, you end up with “roughly 10bp of German GDP at risk”, assuming a stable EURUSD.

Q2 GDP data for Germany is due later this week. The country narrowly averted a recession in Q4 2018, and it’s entirely likely that the economy contracted in the second quarter.

As a reminder, industrial production dropped the most in 10 years in June (on an annual basis). That does not bode well…




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