After the IMF Meetings, Will Germany Embrace Trudeaumania?
Trudeaumania 2.0—the sense of hope and optimism once again coming from a young, liberal prime minister north of the border—has so far found greatest resonance in concrete steps like an openness to refugees, a gender-balanced cabinet, and climate change activism. The new Canadian government’s decision to increase government spending by nearly $100 billion over six years has created less of a sensation. But it deserves attention, especially after the International Monetary Fund’s communiqué at its Spring Meetings this past weekend in Washington notably called for “growth-friendly fiscal policy.”
True, Canada has a particularly favorable fiscal starting position: its debt-to-GDP ratio is the lowest in the G7, and the added budgetary stimulus will still leave the country with a deficit of only 1.5 percent of GDP in 2016, a figure that the U.S. and most of the euro zone can only marvel at. Most, but not all, because Germany expects to close out the year with a so-called schwarze Null—the “black zero” of a balanced budget.
While fiscal policies topped the list of the IMF’s recipe book for global economic recovery, the Fund clearly believes that an “all of the above” approach is required. The IMF also urged governments to pursue accommodative monetary policy, structural and financial reforms, and global cooperation on the international monetary system and to reinvigorate global trade integration as avenues to reignite economic growth. After nearly a decade of stubbornly low inflation, sub-par growth, and weak labor markets despite negative interest rates in some large economies—what Harvard economist and former U.S. Secretary of the Treasury Lawrence Summers has called “secular stagnation”—the IMF’s call for its members to use all the firepower at their command can hardly be construed as alarmist.
While there is an argument to be made that fiscal stimulus would be counterproductive in the indebted countries of the euro zone, the German government clearly has the space to be more expansive. But Berlin has not only decided to keep the fiscal taps closed in order to reach a balanced budget; finance minister Wolfgang Schäuble has also voiced concerns about the European Central Bank’s unconventional monetary policies, fearing that low and negative interest rates are hurting voters on fixed incomes who out of frustration might turn in increasing numbers to the new populist, right-wing Alternative for Germany party.
That may be true, but it would help if those same voters understood how much of a boon the euro has been to Germany. The euro has brought with it the low interest rates and low exchange rate (certainly much lower than if Germany had retained the Deutsche Mark) that have been an important factor in the country’s export surplus, which currently stands at over 8 percent of GDP—higher than either China or Japan. Not only that, but along with a clean-up of underperforming banks in the euro zone, low interest rates need to be a part of the policy package to spur financial institutions to reboot lending to businesses, whose absence has been a drag on European growth.
There is a healthy debate within Germany on the country’s future economic direction. One week before the IMF meetings, in an April 9 letter to the Frankfurter Allgemeine Zeitung (a leading German daily) seven prominent German university and think-tank economists put forward a manifesto for a different set of German economic policies. Rather than greater saving through budget hawkishness and higher ECB interest rates, they argued for more government investment in infrastructure and education, more competition in the German services market, and continued monetary policy activism from the ECB.
Germany is unlikely to adopt the buoyant fiscal expansionism of Trudeaumania any time soon, as the Merkel government seems to believe that the country should set an example for other members of the euro zone through financial rigor. But political realities in Europe could lead Berlin to find some room for flexibility. Germany has taken in nearly 1 million refugees since 2015. Will they be assets or liabilities for the German economy and German society? With a rapidly aging population, Germany faces demographic constraints to its long-term economic growth, which skilled and well-integrated immigrants could help to overcome. But that process won’t happen automatically. Only government investment in education, training, housing, and language learning can ensure a positive result. The alternative is a permanently excluded class of people, dependent on government largesse and rejected by the established population. Can Germany become a little more like Canada?