Crisis in the Gulf

The attack on Saudi oil facilities raises the risks of war

America and Saudi Arabia may feel compelled to retaliate against Iran

PRESIDENT DONALD TRUMP says America’s forces are “locked and loaded” to strike at those responsible for the devastating drone and missile attacks on Saudi Arabia’s industry on September 14th. Is he about to pull the trigger for another American war in the Middle East?

Responsibility for the strikes on the Khurais oilfield and the Abqaiq oil-processing facility—the biggest such plant in the world—was claimed by Iranian-backed Houthi rebels fighting a Saudi-led coalition in the war in Yemen. But American officials dismissed this notion. Not only was the weaponry involved made in Iran, they say.

They also believe the attacks had come not from the south-east of the Arabian peninsula, ie, Yemen, but the north, from Iraq, where Iran runs proxy Shia militias; or indeed from the territory of Iran itself. “Iran has now launched an unprecedented attack on the world’s energy supply,” tweeted Mike Pompeo, the secretary of state. “There is no evidence the attacks came from Yemen.”

Mr Trump was more bellicose but, notably, less specific. He did not name Iran, though he suggested America knew who was responsible for the attacks, and was awaiting confirmation from Saudi Arabia as to the culprit. Within hours, the Saudi-led coalition fighting the Houthis in Yemen mostly endorsed Mr Pompeo’s account.

Even so, Mr Trump has been here before with his threats of war. He used the same “locked and loaded” phrase to menace North Korea in August 2017, before he met and “fell in love” with its dictator, Kim Jong Un, the next year. And just three months ago, Mr Trump revealed America had also been “cocked and loaded” when he aborted an air-raid against Iran just ten minutes before it was due to strike, because of the likely civilian casualties.

That planned raid was to punish Iran for shooting down an American surveillance drone, one of a series of Iranian provocations in recent months. They have included sabotage attacks, blamed on Iranian proxies, on ships in the Gulf; frequent drone strikes from the Houthis in Yemen (Mr Pompeo tweeted that Iran was behind “nearly 100” attacks on Saudi Arabia); and Iran’s announcement in July that it had breached limits imposed on its stockpile of low-enriched uranium that it accepted in 2015 in its agreement with world powers on curbing its nuclear program, the Joint Comprehensive Plan of Action (JCPOA).

Mr Trump was elected on a promise to get America out of its drawn-out wars in the Middle East, and has often sought to draw down America’s military presence in the region. Indeed, his reluctance to resort to military action is one of many differences of opinion that led to the departure of his hawkish national security adviser, John Bolton.

Yet the attacks on Abqaiq and Khurais—if Iran was indeed responsible—are its most serious provocations yet. That is one of three reasons why Mr Trump’s latest threats may be more substantial than his earlier ones. The second is their very familiarity. A man as conscious of his own image and importance as the president will not want to become known for repeatedly crying wolf.

Third is what Emile Hokayem, an analyst at the International Institute for Strategic Studies, a think-tank in London, calls a “design flaw” in the policy of “maximum pressure” on Iran that America adopted when Mr Trump pulled it out of the JCPOA last year. The policy, of crippling Iran’s economy through sanctions in the hope of forcing it to abandon its nuclear programme and rein in its proxies elsewhere in the Middle East, “lacks a strategy of escalation”. Iran, for its part, certainly does have such a strategy. As it steadily ratchets up its provocations, America and its Saudi allies risk looking toothless.

At the very least, faint hopes that Mr Trump might meet Iran’s president, Hassan Rouhani, in the next few weeks seem dashed. The idea for the first such presidential summit since the Iranian revolution in 1979 was pushed by France’s president, Emmanuel Macron, at the G7 summit in Biarritz last month. Mr Trump and Mr Rouhani seemed to entertain the idea, but it was always opposed by Iran’s supreme leader, Ali Khamenei, and the powerful Islamic Revolutionary Guard Corps. Some think the attack on Saudi Arabia is an attempt by hardliners to scupper any hope of a rapprochement.

The oil market, badly disrupted by the lost production, may in fact be a deterrent to American military action. Part of the immediate spike in the price (of about 20% initially, before easing back) was the result of the supply shock. It reduced Saudi oil output by nearly 60%, and the world’s by 6%. Saudi officials said they hoped to restore one-third of production by the end of Monday. But getting back to pre-attack levels will take weeks.

In response, Mr Trump on Sunday authorised the release of stocks from America’s Strategic Petroleum Reserve to “keep the markets well-supplied”. He also said the government would expedite approvals of oil projects in Texas and elsewhere. The pressure on the price, however, comes not just from the big cut in production, but from the mounting fear of conflict—ie, of much more severe disruption to come. With worries growing about the problems facing the global economy, war in the Middle East would hardly be a solution.

Germany and the ECB should do a deal on economic stimulus

The eurozone needs a bigger boost than monetary policy can provide

Melvyn Krauss

ECB president Mario Draghi, left, could offer German chancellor Angela Merkel a grand bargain © Reuters

Germany is faced with a conundrum. It appears to be heading into its first recession in six years and most investors believe it and the rest of the eurozone need some kind of economic stimulus.

The European Central Bank is poised to respond at its September meeting, probably with rate cuts and asset purchases known as quantitative easing. But Berlin has long criticised QE as a disguised bailout to profligate southern European countries that ultimately will be paid by German taxpayers, and pushing interest rates further into negative territory will hit hard-pressed German savers and financial interests.

However, there is another way. There are growing signs that Berlin is preparing a fiscal stimulus package, as it did after the 2008 financial crisis, including measures to prompt investment and cut carbon emissions. Nothing has been decided yet but Europe could be on the threshold of some very important policy changes.

Outgoing ECB president Mario Draghi has already warned that monetary policy may not be enough to boost the eurozone economy. He and the rest of the central bank leadership should offer Berlin a grand bargain — if Germany pushes ahead with fiscal stimulus, the ECB would forgo its monetary stimulus package as long as Europe’s inflation picture does not further deteriorate.

The deal would give the ECB invaluable breathing room: monetary policy is being stretched to breaking point by having to bear the entire burden of fighting Europe’s faltering economy and too low inflation. A grand bargain would bring much needed balance to Europe’s demand management policies, a suitable finale to Mr Draghi’s tenure.

From Germany’s point of view, sidestepping a possible new round of QE and further interest rate cuts could be worth it, even if they are ordinarily sceptical of using fiscal policy to boost economic growth.

Without concessions by the ECB, it is an open question whether there would be enough political support in Germany for a fiscal stimulus even with the looming recession. But with the grand bargain and the ECB’s promise to hold off on monetary stimulus, the fiscal stimulus would be virtually guaranteed. Together they would lead Germany to provide the boost that it and Europe need.

Another advantage of this grand bargain for Germany is that it could help defuse US president Donald Trump’s protectionist threats against the nation. He has been openly critical of Mr Draghi’s plan to provide monetary stimulus. If such a package causes the euro to decline against the dollar, it could fuel possible retaliation from the currency warrior in the White House.

A grand bargain based on fiscal stimulus might well be looked on with considerable favour by Mr Trump, if it increased US exports to Europe without causing the dollar to appreciate. The deal could be portrayed in Washington as a victory for Mr Trump. At best it would lead the protectionist president to delay threatened tariffs on German cars and other exports that experts are convinced are coming in the next several months.

At the same time, if the fiscal stimulus works, the German economy will be stronger and better able to deal with Mr Trump’s protectionist tariffs, should they come.

Even though the case for a grand bargain is convincing, there is an important caveat to be kept in mind. Mr Trump has been pushing the US Federal Reserve to cut American interest rates aggressively. If it does so while the US economy is relatively strong, Europe might need a new monetary stimulus package to protect itself from a skyrocketing euro.

The more the US engages in “beggar thy neighbour” monetary policies, the less attractive a grand bargain in Europe will become.

The writer is a senior fellow at Stanford University’s Hoover Institution

Putin’s party loses more than third of seats in Moscow poll

Voters deliver strong rebuke to Russia’s president after a summer of rising discontent

Henry Foy in Moscow

Russian opposition activist Alexei Navalny casts his vote in Sunday's city council election in Moscow
Russian opposition activist Alexei Navalny casts his vote in Sunday's city council election in Moscow © AP

Russia’s ruling party has lost more than a third of its seats in Moscow’s city council as angry voters delivered a strong rebuke to President Vladimir Putin after a summer of discontent in the country’s capital.

The local ballot followed months of protests against falling living standards, government corruption and moves to suppress opposition politicians, despite a police crackdown against demonstrations.

Candidates backed by a broad opposition movement claimed 20 out of 45 seats in the Moscow city council, according to official election data, while candidates backed by United Russia won 25. At the last election in 2014, United Russia took 38 seats including 10 won by independent candidates it had backed.

“I called on everyone to come to the polls and choose deputies worthy of their opinion, and this is the opinion of Muscovites,” said Valentin Gorbunov, chairman of the city’s electoral commission. “Our task is to organise a vote in accordance with the law . . . Let political scientists evaluate the results.”

While the result of the normally low-key local elections will have little impact on how Moscow is governed, Sunday’s ballot was seen as a barometer of dissatisfaction with Mr Putin, ahead of parliamentary elections in 2021 and his potential handover of power in 2024.

The ruling United Russia party was also routed in elections for the local parliament in the far eastern coastal region of Khabarovsk, winning just two out of 36 seats. However, its candidates comfortably won all the contests that took place on Sunday to elect regional governors, amid allegations of ballot stuffing in some areas.

Eleanor Bindman, at Manchester Metropolitan University, said it was important not to exaggerate the significance of the poll results “given that pro-Kremlin candidates in the more important gubernatorial elections elsewhere, such as St Petersburg, were elected as planned”.

But she added that the strong performance showed that the opposition was “capable of working together” and gave them “the opportunity to prove themselves at the local level”.

While some of the opposition parties that won council seats are considered to have the Kremlin’s backing, the results suggest that a campaign led by activists to encourage citizens to vote tactically to stop United Russia candidates was successful.

Andrei Metelsky, head of United Russia’s Moscow branch, lost his seat that he had held since 2001.

“This is a fantastic result for smart voting. We fought for it together. Thanks to everyone for their contribution,” said Alexei Navalny, Russia’s most prominent opposition activist who was imprisoned during the protests.

Dmitry Peskov, Mr Putin’s spokesman, said on Monday that the election was “very, very successful for United Russia. It might have gotten more seats at some places and fewer at others, but on the whole, the party showed its political leadership nationwide.”

Trust in Mr Putin plummeted this year after a pension reform that forced Russians to work five years longer, a rise in VAT and a fifth consecutive year of falling household incomes. National polls show fewer than half of voters think his government is doing a good job.

Protests erupted in Moscow in July after a dozen opposition candidates were barred from running in Sunday’s election. Officials said they had not collected enough authentic signatures, something the candidates denied.

The move sparked mass weekly demonstrations that attracted up to 60,000 people, despite heavy-handed crackdowns by riot police that left many protesters injured and resulted in thousands of arrests with some activists sentenced to years in jail.

That followed other protests in Moscow against the arrest of a journalist and demonstrations in regional cities.

The End of Shareholder Primacy?

The recent decision by America's Business Roundtable to abandon its support for shareholder primacy was a long time coming, and reflects a broader shift toward socially conscious investment. Now that the multi-stakeholder model is receiving the attention it deserves, it will be incumbent on governments to create space for it to succeed.

Michael Spence

spence119_Witthaya Prasongsin_getty images-stock

MILAN – This month, the Business Roundtable, a group comprising the CEO’s of America’s largest and most powerful corporations, formally abandoned the view that maximizing shareholder value should be a company’s primary objective. The implication is that shareholders will no longer always take precedence over other stakeholders such as customers, employees, suppliers, and the communities in which firms operate. In its statement justifying the move, the organization cites the need to pay fair wages, provide more benefits, and invest in training to help employees navigate a rapidly changing economy.

Corporate governance has been moving in this direction for some time, owing to a growing awareness that private-sector engagement will be necessary to address society’s most difficult challenges. Customers, employees, and investors have reinforced this trend by increasingly voicing their concerns about social issues. This emerging consensus is crucial for reconciling the multi-stakeholder model with corporate investors’ longer-term financial interests.

A similar evolution has occurred in the asset-management sector. The share of investors embracing “environmental, social, and governance” (ESG) criteria has been growing over the past few years, with many top asset-management firms helping to lead the way.

This trend raises the question of whether shareholders with a purely financial interest still have the upper hand. Much will depend on their numbers, the assets they control, and their time horizons. But, clearly, support from long-term investors such as pension funds and others managing major pools of assets has helped tip the balance toward ESG.

At any rate, the point of the multi-stakeholder model is not to render investors and corporate boards passive or disengaged. We are not returning to the era of “managerial capitalism,” the corporate-governance model that preceded the arrival of the activist investor and the principle of shareholder primacy. But nor should one interpret the Business Roundtable’s announcement as merely another small positive step in a longer trend. It is much more than that.

For starters, the group’s statement this month is a clear signal of American CEOs’ intention to change not just corporate governance, but also the role of business enterprises in society. It establishes new boundaries for the pursuit of returns on capital – boundaries that are meant to protect constituencies (employees, poorly informed customers, suppliers, future generations) that often lack the market power to protect themselves. Most important, the move comes at a time when wealth inequality is rising, and when the ownership of financial assets is becoming increasingly concentrated.

But an even more exciting feature of the shift toward socially conscious corporate governance is that it opens the door for new, more creative business models. Already, some of the world’s most impressive companies (in terms of returns to investors) have built business models around solving economic and social challenges. Consider the Chinese e-commerce giant Alibaba.

Founded with the goal of expanding market access for small and medium-size companies, it and its financial arm, Ant Financial, remain committed to that mission. A growing body of evidence in China and other countries suggests that vibrant e-commerce and fintech ecosystems of the type created by Alibaba can make substantial contributions to inclusive growth.

Earlier this month, before the Business Roundtable announcement, the Indian conglomerate Reliance Industries Limited held its annual meeting in Mumbai, where its chairman, Mukesh Ambani, delivered a striking speech. After pointing out that value creation for the company now depends on partnerships with Indian firms as well as multinationals like Microsoft (for its cloud-computing offerings), Ambani identified Reliance’s stakeholders as the “Indian economy, Indian people, our customers, employees, and shareowners.” There could be no clearer statement of the multi-stakeholder model.

A key component of Reliance’s strategy is its affiliate Jio, which started selling affordable smartphones in 2016 with the goal connecting everyone in India. According to Ambani, Jio has more than 340 million subscribers, and is adding ten million each month. In other words, a company founded with a social mission less than three years ago is already the largest smartphone operator in India, and the second-largest single-country operator in the world.

Moreover, with the use of India’s biometric-identification program (Aadhaar), Jio appears to be making a major contribution to digital connectivity for a wide range of Indians, including poorer people who previously did not have bank accounts or access to credit. And as it continues to grow, it will develop a host of other valuable services for small businesses and millions of entrepreneurs, reinforcing the positive impact it is already having on inclusive growth.

Digital technologies tend to come with high fixed costs, but low to negligible variable costs. Once established, a firm like Alibaba or Jio can thus provide a platform for countless other business models built around social objectives. And this effect is especially powerful in potentially large markets like China, India, Indonesia, Brazil, and the United States.

The Business Roundtable’s recent declaration represents a major step forward for the multi-stakeholder model. The example set by industry leaders matters. And it is no accident that some of today’s most successful global companies were explicitly conceived and built on the basis of multi-stakeholder values.

But a word of caution is in order. Although the transition to a multi-stakeholder model is necessary to make progress toward other social goals, it is not sufficient. Corporations alone cannot solve our most pressing global problems. They will need the support of governments, which have a responsibility to create the space and provide the tools for multi-stakeholder businesses to maximize their positive social impact.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World (Farrar, Straus and Giroux).

Economic Downturn

Germany May Abandon Its Beloved Black Zero

By Christian Reiermann

Photo Gallery: Saying Goodbye to the 'Black Zero'

Chancellor Angela Merkel is still clinging to her policy of a balanced budget, but it is becoming increasingly clear that Germany's economic downturn could soon usher in a return to deficit spending. Government ministries are already signaling a willingness to abandoned years of cautious fiscal policy.

For years now, a balanced federal budget, known here in Germany as the "schwarze Null," or black zero, without any fresh borrowing, has been a permanent fixture of German fiscal policy. After four decades of chronic borrowing to finance the German national budget, the shift stood for the renunciation of the debt state and became a symbol of sound policy.

But now the issue is the subject of debate again -- not only due to expensive political plans, but also the threat of a recession in Germany. For now, the federal government is still sticking to its policy of a balanced budget. At the beginning of last week, Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) party announced she would continue to strive for a federal budget that doesn't contain any new borrowing.

Her vice-chancellor, Finance Minister Olaf Scholz of the center-left Social Democratic Party (SPD), hastened to agree with her. But what about the country's plan to eliminate the "solidarity tax" it implemented after German reunification? Or intended spending on climate protection? Or the possibility of an economic slowdown? "We can accomplish the tasks at hand without accruing new debt," Scholz said.

Pressure Grows to Loosen Fiscal Policy

The two most senior members of the German government expressing their commitment to a balanced budget is by no means self-evident. The idea of forgoing any new borrowing in the future has increasingly come under pressure in recent weeks, particularly among Schulz's fellow Social Democrats, which are the junior partner in Merkel's coalition government. The party is currently searching for a new leader and candidates for the SPD's top job no longer want anything to do with a balanced budget, which is enforced in the form of a so-called "debt brake" that has been part of the German constitution since 2011. They see it as an obstacle to implementing their policies.

Efforts to loosen fiscal policy in Germany have broad support from many prominent economists across the country. For months now, economists from all sides of the fiscal spectrum -- from Marcel Fratzscher, head of the economic think tank DIW Berlin, to Michael Hüther from the employer-friendly German Economic Institute -- have been calling on the country to take out more loans. To many, the debt brake's requirement that the federal government's cyclically adjusted new debt not exceed 0.35 percent of gross domestic product (GDP), or about 12 billion euros, is increasingly viewed as a corset that constrains the economy.

They reason that as long as the government can make money when taking out debt, politicians should be dipping deep into the credit line to stimulate investment. They basically pay for themselves when interest rates are negative, as they yield a decent return through higher growth. There is, of course, some truth to that, but it also comes with its share of perils. For one, what guarantees are there that the government will only lend money for investments and not for social benefits? Or that interest rates will remain low in the longer term?

Pressure From All Sides

Nevertheless, calls to abandon the strict implementation of the balanced budget in Germany are growing. The costs that will be incurred through the elimination of the "solidarity tax" for 90 percent of Germany's taxpayers in 2021 have already been factored into the government's budget planning at around 10 billion euros ($11.1 billion) per year, but now, following an economic upswing that lasted almost a decade, the country is on the verge of a recession.

Even representatives of the business community, most recently the Federation of German Industries (BDI), are calling on politicians to finally free themselves from their self-imposed shackles to boost the economy. And that's saying something given that businesses and industry associations were among the loudest voices calling on politicians to exercise budgetary discipline and thrift in the past.

In view of the pressure coming from all sides, the statements coming from Merkel and Scholz seem like marching orders from the top. This can't be easy for the finance minister, not least because confidence in the utility of the debt brake and a balanced budget has been dwindling within his party. There's also an influential faction of career bureaucrats within the Finance Ministry who believe it will be impossible to finance every climate protection initiative that's been announced by the various ministries without any additional borrowing. Some 32 billion euros would be needed to implement these projects between now and 2023.

To Borrow or Scale Back

A total of 66 measures have been submitted by six different ministries. They include, for example, 50 million euros earmarked for the Central African Forest Initiative, along with a program for improved material and resource efficiency in industry (110 million euros) and a nearly 1 billion-euro infrastructure program for bicycle paths. The problem is that there is no funding yet for any of these programs.

Officials within Scholz's Finance Ministry have calculated that between 5 and 15 billion euros for new climate protection measures would be compatible with the goal of a balanced budget. And even that will only be possible if the government finds some additional money. In that sense, Merkel's and Scholz's commitment to a balanced budget will also likely mean scaling back Germany's vision for a comprehensive climate protection regimen.

Scholz could mobilize the necessary funds for a scaled-down version by shifting around money in the budget, but for the most part, those funds will still come from a new CO2 emissions tax that the coalition government hopes to have hammered out by Sept. 20. The conservatives in government, made up of Merkel's CDU and its Bavarian sister party, the Christian Social Union (CSU), favor a solution in which permits to emit CO2 are auctioned off. But the Social Democrats would prefers to levy a tax on every ton of greenhouse gas emitted.

Either way: The money is to flow into the existing energy and climate funds from which the measures will be financed. At the end of 2019, they will have combined account balances of roughly 7 billion euros, which would be enough to keep the federal budget balanced for at least the next year.

The chancellor herself is largely responsible for this. Her supporters are notoriously unhappy with the government's current coalition agreement, which Merkel's conservatives negotiated with their Social Democratic partners. They believe the CDU got the short end of the stick. But Merkel has been able to accomplish two of her goals: First, she hasn't had to raise taxes at all, and she has also managed to maintain the balanced budget agreed to in the coalition contract.

'An Achievement We Cannot Give Up Lightly'

That first pledge, though, could soon be undermined by the planned climate protection policies. Regardless of how carbon dioxide is taxed in the future, it will amount to an additional burden on both people and businesses. That's why it would be extremely difficult, politically, for Merkel to give up on her second goal.

"The balanced budget is an achievement we cannot give up lightly," says Andreas Jung, deputy head of the joint CDU and CSU parliamentary group in the Bundestag, Germany's federal parliament. His portfolio is budget and finance, and together with a CSU colleague, he has also accepted the task of drawing up the Christian Democrats' climate protection plan. He argues that sustainability is not only an imperative in environmental policy, but also a necessity when it comes to government fiscal planning. "Both go together, and both are also expressions of intergenerational fairness," he says.

Scholz, as the SPD finance minister, also has good reasons to cling to the balanced budget. For Scholz, a budget without any additional borrowing under his aegis is proof of good governance on the part of the Social Democrats -- and also that they're responsible with money and not just a tax-and-spend party.

He's also well-aware that the conservatives would never abandon both of these key issues in the coalition treaty at the same time. In that sense, it hasn't even been worth his while to test the limits of the debt brake.

A Psychological Barrier

But the debt brake does, in fact, leave some room for maneuver. Overall, Scholz could borrow about 12 billion euros a year if the economic situation didn't provide him with any additional revenues. But for years now, the government has succeeded in generating extra revenue without having to rely on borrowing. The additional income, which is cyclical and tied to positive economic developments, is calculated in a complicated procedure and restricts the finance minister's ability to borrow. According to officials in his ministry, though, Scholz could almost completely exhaust this maximum limit in the coming years without even violating the requirements, because the additional revenues attributable to positive economic developments are no longer expected due to the economic downturn.

The leeway provided by the debt brake could easily be enough to finance climate protection measures until 2023, but Chancellor Merkel and Finance Minister Scholz are preventing this from happening by clinging to the idea of a balanced budget.

In fact, the fixation on a "black zero" is a psychological barrier. Economically, it makes no difference whether the German government generates a surplus of 10 billion euros, takes out loans of the same amount or gets by without new borrowing. Measured against a budget of over 350 billion euros and a GDP of 3.3 trillion euros, the order of magnitude is infinitesimally small, regardless of whether the zero on Germany's books is black or red. And yet conservative politicians still seem reluctant to let go of the balanced budget they have grown so accustomed to. To them, the balanced budget is an instrument with a disciplining effect. They believe many spending requests aren't seriously considered because they would jeopardize the goal of a balanced budget, which is highly regarded by many German voters.

A Breach in the Dam?

Some worry that a new sense of greed could be kindled if the goal of a balanced budget is scrapped. "If the zero point is crossed, I fear that there will be a breach in the dam that can no longer be plugged," says Jung, the deputy head of the CDU and CSU parliamentary group.

Many conservative Christian Democrats also don't believe the current economic slowdown provides justification to go full swing with government spending to counter a possible downturn. "Right now, an economic stimulus package would be inappropriate and ineffective," argues Eckhardt Rehberg, the leading budget policy planner for the CDU and CSU in parliament. "The federal investment coffers are full to bursting with money, they just need to finally get tapped." The construction industry, which would benefit most from state investment programs, is already working at full capacity. "We have to preserve our ability to act in the face of severe crises and not spend the whole wad of cash at the slightest drop in gross domestic product."

Increasing Willingness To Let Go

Even though the coalition government in Berlin isn't ready to actively counter the downturn yet, Merkel's Chancellery and Scholz's Finance Ministry are becoming increasingly willing to insist less on a balanced budget in order to avoid exacerbating a possible economic crisis. If the economy continues to shrink even more in the coming months, and tax revenues collapse and social spending rises as a result, sources in both the Chancellery and the Finance Ministry say there will be a willingness to veer from the balanced budget and begin borrowing.

Using financial jargon, a senior government official puts it this way: "We'll let the automatic stabilizers do their work, even if that puts the black zero at risk." In layman's terms, this means the holes that would be torn in the federal budget by an economic crisis would be plugged through new borrowing. This applies to both the current budget and the one for next year that Finance Minister Scholz is to present to parliament at the beginning of September.

Parliamentary deliberations will continue until the end of November before the final adoption of Germany's 2020 budget. That still leaves plenty of time to factor in the forthcoming growth forecast and the tax revenue estimate that will be based on it. And if it becomes clear that those revenues won't be enough to finance the planned expenditures, the German government will likely conduct fresh borrowing for the first time in years. In that case, Germany's "black zero" would become a red one simply by doing nothing.

Once this threshold has been crossed, the next step wouldn't be difficult: If the crisis worsens more than expected, additional debt could quickly be used to mobilize additional money for an economic stimulus program -- in the form of a supplementary budget, for example.

Anything else would be disastrous. If Merkel and Scholz were to further cling to a balanced budget, it would mean cutting spending in the middle of a crisis -- a move that would run contrary to all textbook wisdom. An austerity course would only serve to accelerate and exacerbate the recession, because it would cause demand to collapse.

As one economics expert in the government puts it: "Nobody has any intention of saving themselves into a crisis."

Take aim

Germany needs fiscal stimulus. Here’s how to do it. 
The economy needs both permanently higher investment and a temporary boost

ON AUGUST 19TH the Bundesbank warned that Germany could soon be in recession. The economy shrank in the second quarter of the year; two consecutive quarterly contractions are often taken to define a downturn.
In June industrial production was 5.2% lower than a year earlier, the biggest fall in a decade.
Some investors hope that the run of bad news will persuade Germany to overcome its deep-rooted suspicion of fiscal stimulus. Sure enough, a day before the central bank’s warning, Olaf Scholz, the finance minister, said the government could afford a hit to its finances of €50bn ($56bn)—about 1.4% of GDP.

Unfortunately Mr Scholz has shown little desire to use that money now. Chancellor Angela Merkel has said she sees no need. That is lamentable. The case for using fiscal stimulus to fight the downturn has recently become overwhelming.

There are arguments to be made against higher deficits when economies weaken and inflation is low. Spending can be unaffordable because the government is already too indebted. Some critics argue that it is up to central bankers, not finance ministers, to cope with the economic cycle. A worry is that more borrowing will drive up interest rates, deterring private-sector investment.

None of these applies to Germany. Stimulus is patently affordable. The government can borrow for 30 years at negative interest rates. As a result, it could probably spend double what Mr Scholz suggests for years and still keep its debt-to-GDP ratio steady at around a prudent 60%.

Central bankers are hamstrung. Short-term interest rates cannot fall much further.

The European Central Bank is likely to start buying more assets in September, which will help but may not be enough. And crowding out investment is not a concern. Negative rates are a sign that Europe is awash with savings and bereft of plans to put them to use. If Germany deployed them to improve its decaying infrastructure, its firms would probably invest more, not less.

The country needs looser fiscal policy in both the long term and the short term. It has neglected infrastructure in pursuit of needlessly restrictive fiscal targets, most recently its “black zero” ban on deficits. This has, for example, left 11% of its bridges in poor condition and its railways plagued by delays.

Germany should replace the deficit ban with a rule allowing borrowing for investment spending. It should use tax breaks to encourage its private firms, innovation laggards, to invest more too, including in research and development.

In the short term Germany needs demand. This necessity has grown in strength this year as the economy has deteriorated. Although unemployment is just 3.1%, the Bundesbank has warned that joblessness could soon rise. The domestic economy cannot endure brutal global trading conditions for ever.

It would be better to use fiscal policy to prevent a deep downturn than to wait for recession to bring about a bigger deficit of its own accord. If a preventive stimulus turned out to be premature, the worst that could happen is slightly higher inflation than today’s 1.1%—which would in any case help the ECB hit its inflation target of close to 2%. A little more inflation would also even out imbalances in competitiveness between Germany and the rest of the euro zone.

Unfortunately infrastructure projects take time to get going. They face planning hurdles and bottlenecks in the construction industry. The federal government has already struggled to spend all of its existing meagre infrastructure budget.

The best thing, therefore, would be to supplement a long-term programme of infrastructure investment with an immediate, temporary boost, such as payroll-tax cuts, designed to forestall a downturn. Germany stands to benefit from both prongs of this strategy. Continuing to reject them is fiscal folly.