Dangerous prudence

Fat fiscal surplus will eventually weaken Germany

Germany's obsession with budget discipline is reaching a grotesque level. Europe's biggest economy is on track to generate annual fiscal surpluses north of Euro 20 billion both in 2015 and 2016. That's the forecast of the country's four leading economic think tanks, included in a report for the government. The biggest windfall in a generation creates a unique chance to renew the country's ageing capital stock and, hence, foster future growth. But excessive fiscal prudence stands in the way.

Berlin's fiscal boon looks like more than just a flash in the pan. Germany has had fiscal surpluses three years in a row, rising from Euro 4 billion in 2012 to Euro 18 billion in 2014. That is not due to passing cyclical tailwinds. The structural surplus is expected to rise from 0.7 per cent of gross domestic product in 2015 to 0.8 per cent next year.

Angela Merkel says bringing public debt down is an obligation toward future generations. That is not an absurd point to make but she is pushing it too far. Given nominal economic growth of 2.5 to three per cent and low interest rates, debt as a percentage of GDP would come down with a balanced budget or a slight deficit. Germany's stinginess looks excessive even against the backdrop of its rigid "debt brake," enshrined in the country's constitution in 2009, which allows a structural annual deficit of 0.35 per cent of GDP.

Germany's thriftiness is now a greater threat for prosperity than fiscal largesse would be. For more than a decade, Berlin has spent too little on public infrastructure. As a percentage of GDP, public investment has come down a third over the past 25 years, denting the country's capital stock. A simultaneous investment slump in the private sector has made matters worse. Ageing roads, bridges and factories will reduce future growth potential.

While Angela Merkel's coalition has vowed to bolster weak investment, actions so far have been mostly of a symbolic nature. Swelling government coffers provide the financial firepower to do more. But a narrow focus on debt reduction will make Germany miss the opportunity, a historic mistake.