Review & Outlook

Germany Can’t Save Europe

Berlin needs tax cuts for growth, not more Keynesian spending.

         

It’s a ritual: Gather some economists in a room and sooner or later they’ll start demanding that Germany spend more to revive global growth. So it was again in Washington last week, as the semiannual meeting of the International Monetary Fund became the latest venue to criticize Berlin’s fiscal responsibility.

Economists and non-German politicians are incensed that the eurozone’s leading economy is sticking to its plans to balance its budget by 2020, and to reduce government debt as a share of the economy to below 60% in line with eurozone rules. With government debt already falling to an estimated 68.5% of GDP this year from more than 80% in 2010, and its budget in surplus, these critics want Germany to ramp up Keynesian spending to save everyone else.

“Countries with fiscal space should do more to bolster growth, particularly where risks of low growth and low inflation have materialized,” the IMF said. “Higher infrastructure investment in Germany would benefit the country itself and have positive economic spillovers on neighboring countries that undertake significant consolidation.”

The theory is that if Germany embarks on a public-works spending spree to goose domestic demand, booming imports will help its neighbors export their way out of their fiscal and slow-growth holes. In this telling, the eurozone’s rules capping annual deficits at 3% of GDP are a guideline, not a limit.

This is a recipe for blowing up the eurozone. High-saving Germans already are chafing as the European Central Bank’s monetary policy shifts the burden of eurozone economic adjustments onto Germany. Germans also have lent considerable taxpayer support to prop up the euro.

This includes contributions to, and explicit backing for debt issued by, the European Stability Mechanism that has bailed out euro members, and implicit support for the risks of the ECB’s bond-purchase program.

Now Germans face demands to spend their money for Keynesian projects they don’t want, for the benefit of those same neighbors. Fiscal rectitude is popular in Germany, and the pledge to restore budget balance was an important component of Chancellor Angela Merkel’s platform when she ran for re-election in 2013.

Germany does have fiscal room to stimulate its economy, but the IMF and other critics have it backward. Berlin’s surpluses since 2014 are a sign that its tax burden is too high and is limiting the economy’s growth potential.

The finance ministry estimates government will collect more than 44% of total economic output in taxes each year for the foreseeable future. Taxes on labor are the third-highest in Europe behind Belgium and Austria. Out of every euro an employer pays to employ an unmarried worker, 49.4 cents go to the tax man, according to a new OECD report. Germany exceeds the OECD average in income tax and employer and employee social contributions. Its corporate-tax rate of nearly 30% is well above the EU average of around 22% and the OECD average of 25%, according to KPMG.

Fiscal stimulus should focus on allowing German companies and households to keep more of their money. Domestic consumption already is taking over for exports as an engine of Germany’s growth, which at around 1.5% is strong by European standards. This boost has happened as falling global energy prices increase household inflation-adjusted earnings.

Tax-rate cuts would build on that trend. So would abandoning Berlin’s ruinously expensive energy policy, which saddles households with hundreds of billions of euros in higher taxes and steeper energy bills—and causes tens of thousands of job losses—in pursuit of a futile conversion to renewable electricity.

Such tax cuts are proven growth-boosters, while the multiplier from public-works binges remains a figment of the Keynesian imagination. German voters are smart enough to realize that bridges to nowhere aren’t the secret to growth, and maybe it’s time for the rest of the world to stop insulting their intelligence.

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