Revenge of the Black Zero

How Germany became a cautionary tale

Back in 2010 — just as the disastrous push for fiscal austerity in the face of high unemployment was gaining momentum across the advanced world — my wife and I attended a conference at the Institut für Weltwirtschaft in Kiel, Germany. The keynote speaker was Wolfgang Schäuble, Angela Merkel’s finance minister, widely considered the father of the “black zero,” Germany’s commitment to balanced budgets no matter what.

Partway through the speech Robin took off the headphones carrying the simultaneous translation to focus on Schäuble’s body language. She eventually leaned over to say, “As we leave the room we’ll be given whips to scourge ourselves.”

Unlike U.S. conservatives, who rail about the evils of government debt, then pass budget-busting tax cuts which they claim will magically pay for themselves, the Germans have been serious about fiscal austerity. On the eve of the 2007 financial crisis America and Germany had similar levels of public debt as a share of GDP. Since then, however, Germany has kept debt low, while we very much haven’t:

Germany has also achieved huge trade surpluses, especially in manufactured goods, that are beyond Donald Trump’s wildest dreams. America runs a trade deficit in manufactures of more than 4 percent of GDP, while Germany runs a surplus of more than 8 percent. Largely as a result, manufacturing plays a bigger role in Germany’s economy than it does in ours, although it’s still smaller than the role industry played in, say, the 1960s:

Source: World Trade Organization and World Bank

From a fiscal point of view, then, Germany looks like a model of virtue. From a Trumpian point of view it looks like a big winner in international competition. So how has the German economy been doing?

Nicht gut.

Most glaringly, Germany’s economic growth has stalled. The contrast with the United States, which boomed under Biden, is stark:

Back when we were listening — or, in Robin’s case, not listening — to Schäuble’s sermon, many policymakers had bought into the notion that fiscal austerity would actually promote growth by increasing business confidence. At the time, I derided this view as belief in the “confidence fairy.” And Tinker Bell certainly hasn’t come through for the Germans.

Incidentally, for those complaining that Biden’s spending caused inflation, it seems worth noting that German inflation since the start of Covid has been roughly the same as in the U.S.:

And no, that’s not because of gas prices. As the International Monetary Fund points out,

It’s certainly true that the shutoff of Russian gas in 2022 contributed to spiking inflation and cost-of-living pressures. However, the rise in gas prices has proven to be temporary. After soaring in 2022, wholesale gas prices have now fallen back to 2018 levels.

Less stark as a short-run issue but obvious if you spend time visiting Germany is that the obsession with holding debt down has led to inadequate investment in infrastructure. The IMF has a fairly startling chart on this:

The IMF also notes:

Money that has been budgeted for investment is routinely underspent, often because of staff shortages in municipalities.

Arguing from personal anecdotes is always problematic, but maybe it’s worth mentioning that twice last year I came very close to missing connections in Frankfurt because one of the world’s major world travel hubs still, in many cases, forces passengers to take a bus from their plane to the terminal, and I had to lug my suitcase up and down many flights of stairs because the escalators were all out of order.

Many discussions of Germany’s problems focus on bad bets German businesses and politicians made about the future shape of the world economy, notably relying on imports of cheap natural gas from Russia and exports of internal combustion engine vehicles to China. Oh, and there’s also the deeply foolish decision to shut down all the nation’s nuclear power plants.

But a large modern economy is much more diversified and much more flexible than many people imagine. It takes more than a few troubled industries to bring about the kind of underperformance we’ve seen in Germany. As the IMF report I’ve been citing correctly notes, Germany’s problems have deeper roots, especially lagging productivity (exacerbated by inadequate public investment) and a shrinking working-age population:

That bump, by the way, is the influx of Syrian refugees Merkel permitted — the best thing she ever did and, of course, the most unpopular.

I’m not going to try to devise a new German growth strategy on the fly. What I learn from the German experience is, instead, the wrong-headedness of the obsessions that have dominated much of economic policy in the United States and across the advanced world.

An obsession with debt and budget deficits did a lot to hobble recovery from the 2008 financial crisis in both Europe and America. After Covid struck, the Biden administration, having learned from that experience, made sure that the economy got the help it needed — and we had a spectacular recovery. Germany, on the other hand, honored the black zero — and got economic stagnation as its reward.

These days Trump and company are obsessed with a different deficit, the trade deficit, and imagine that eliminating that deficit will make America rich (which it already is, but they won’t admit it.) But Germany runs big trade surpluses, especially in manufactures, and they aren’t bringing prosperity. In fact, in Germany, as in China, trade surpluses are a symptom of weakness, not strength.

A decade or so ago, many Germans I knew regarded their nation as an economic and even moral role model, exemplifying the rewards to those who practice the virtues of the Swabian housewife — frugality and hard work. At this point, however, Germany has gone from role model to cautionary tale — a warning about the costs of rigid thinking.

MUSICAL CODA