Germany needs to become a little bit more Italian

While the Italian government is exploring how far it can go beyond the European boundaries by loosening the fiscal reins, the German government is leaving available room for a stimulating fiscal policy partly unused. To the extent that the German economy is currently operating at full capacity, this seems to be the right economic policy choice. But upon closer inspection, the German economy could use more stimuli to strengthen its economic growth potential. Economically, this is a better vision for meeting the costs of an ageing population than that of the schwarze Null. A more flexible fiscal policy could also help to reduce the huge current account surplus in Germany’s balance of payments. This would create a more favourable economic environment for other euro countries for further necessary consolidation. If Italians want to remain in the euro area, they need to become a little more German. It would also help if Germans were a little more Italian.


The European fiscal framework forces the EU member states into a straitjacket. This makes it very difficult for the euro area as a whole to establish an appropriate fiscal policy, especially if the dynamics of economic growth and public debt diverge across countries. That is the case today. Countries such as Italy and France are still struggling with a negative (or very small) output gap (the difference between realised and possible output). A more expansionary fiscal policy may be appropriate for them. But at the same time, both countries cannot afford expansionary fiscal policies because of their high public debt. For the stability of the euro area, the European fiscal framework requires strict budgetary discipline from them.

This makes the assessment of the draft budgets for 2019 a delicate job for the European Commission (Economic Opinions, 20 Sept. 2018). Concerned, even angry eyes are focused on Italy. In many circles, the thrifty Germany is simultaneously praised as a guide. Nevertheless, there are also critical comments on German fiscal policy, as the IMF, the ECB and the EC have repeatedly pointed out.

Schwarze Null

Germany can afford a stimulating fiscal policy. It has a structural budget surplus and, thanks to falling public debt and low interest rates - itself the result of the ECB’s loose policy and Germany’s status as a safe haven for investors - interest costs are now below 1% of GDP. So there is plenty of room to stimulate the economy. But at first sight, the country does not need it from a business cycle perspective. Despite the recent sputtering, economic growth in Germany is stronger than what is considered sustainable in the long term. This is evident from the historically very low unemployment rate, among other things.
Rather, German policy-makers are looking ahead and notice that they will face even more of an ageing cost than in many other countries. They already want to save for this. Politically, this is translated into the obsession with the schwarze Null: the government budget must not plunge into the red figures; it must at least be in balance. Such a focus on saving is a healthy economic response for individuals with large expected future expenditures. For an economy as a whole, however, this is only half the answer.

After all, the costs of ageing can only be financed if the economic base remains sufficiently large in the future. To this end, savings must be converted into productive investments. Germany is failing in this respect. Year after year, it records record current account surpluses on its balance of payments. This reflects Germany’s strong international competitiveness, but also the fact that savings are not sufficiently used for investment in the German economy. In particular, public investment is among the lowest in the world (as a percentage of GDP).

Cautiously expansive

On 6 July 2018, the new government approved its financial plan until 2022, as well as the draft budget for 2019, which is now in the hands of the European Commission. Over the entire legislature, it will reduce tax and parafiscal charges cumulated by 1.4 percentage points of GDP and increase expenditure by 2.5 percentage points. Families in particular will benefit from the reduction in charges, some of which will focus on more affordable housing. Additional expenditure will include education, research, universities, childcare and digitisation. These should strengthen the economy.

The multi-annual plan means a relaxation of German fiscal policy. Nevertheless, it will never jeopardise the schwarze Null. The budget surplus is expected to fall from 1.5% of GDP in 2018 to 0.5% in 2020 and stabilise thereafter (Figure 1). The development of the structural budget balance1 provides a better picture of the policy impact. The government expects that the budget of all German authorities (federal government, Länder, local authorities and social security) will close in 2018 with a structural surplus of 1.5% of (potential) GDP. This means that there will be a budgetary stimulus margin of around 2 percentage points of GDP. A large part of this will remain unused. Indeed, the structural surplus will only decrease to 0.5% in 2019 and 0.25% in 2020 and 2021. In 2022, the surplus will rise again to 0.5% of (potential) GDP. The government will therefore strengthen the German economy, but will not go as far as it could.

Figure 1 - General government budget balance Germany (percentage of (potential) GDP)

Source: KBC Economic Research based on Eurostat, EC (Ameco), Ministry of Finance Germany

Missed opportunity

By not using budgetary room for manoeuvre, the government is missing out on opportunities to create an even stronger economic basis for bearing the ageing costs. It is also shirking its responsibility in the currency union. According to the procedure on macroeconomic imbalances, the large current account surplus in Germany calls for correction just as much as deficits. The more Germany stimulates demand, the more that demand will leak to other euro countries. This enhances the feasibility of further consolidation and reforms there. It also weakens those countries’ excuses not to pursue consolidation further. More budgetary stimulus is likely to lead to higher inflation in Germany. Even if that is a horrifying idea for Germans, it would promote the normalisation of inflation in the eurozone. It would also allow the ECB to normalise its policies less reluctantly – policies which many Germans, by the way, don’t like. In short, if the Italians want to remain in the eurozone, they will have to become a little more German, at least economically. But in the current circumstances, it would help if Germany were a little bit more Italian.

1/ This balance does not include the impact of the economic cycle on budget revenue and expenditure, nor the impact of exceptional or temporary measures. In the European budgetary framework, each country has a medium-term objective for its structural budget balance. For Germany, this is a deficit of no more than 0.5% of (potential) GDP.


All opinions expressed in this publication represent the personal opinions of the author(s) at the date stated therein and are subject to change without notice. KBC Groep NV makes no warranties as to the extent to which the scenarios, risks and forecasts proposed reflect market expectations, nor as to the extent to which they will actually materialise. All forecasts are indicative. The data in this publication are general and purely informative. The information cannot be considered as an offer to sell or buy financial instruments. Nor can it be considered as investment advice, investment recommendation or "investment research" within the meaning of the law and regulations on the markets in financial instruments. Save the express prior and written consent of KBC Groep NV, any transfer, sale, distribution or reproduction of the information, publication and data is prohibited, regardless of form or means. KBC Groep NV cannot be held liable for the accuracy or completeness of the information or for the direct or indirect damage that would result from the use of this document.

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