No central banker has come out and said it yet, but the reality is that most of them are pretty much out of ideas as to what to do next to revive their struggling economies. Apart from in the US where the economy is performing reasonably well, all conventional and non-conventional measures tried by central banks to date have had limited success, and it’s difficult to know what more they can do. Mario Draghi has probably come closest to admitting defeat when, on several occasions recently, he has told euro zone governments that they now need to play their part via their fiscal policies.
However, the large European economies that are most in need of fiscal stimulus – France, Italy and Spain – are the ones that can least afford it. All are either in breach of the EU’s annual budgetary limits, or have existing levels of debt that are far in excess of what is safe or healthy, and so none of them is in a position to either cut taxes or increase government spending.
There is little doubt that when Draghi talks about fiscal stimulus, it is Germany that is uppermost in his mind. Germany’s economic success means that it now has very significant current account and budgetary surpluses – i.e. it exports far more than it imports, and its government’s tax intake far exceeds expenditure.
Last year it had a record current account surplus of almost €250bn – that is the net inflow of funds into the economy at the expense of its trading partners. In 2015 it also had a government budget surplus of around €35bn (1.2% of GDP). It was expected that the arrival of over 1 million migrants into Germany over the past year would prompt a major increase in Government spending, but figures released last week show that the surplus actually increased in the first 6 months of 2016. The German Government clearly has considerable scope to increase expenditure, and if it did so it would inevitably have a positive spillover effect on the rest of Europe.
It can be argued that the average German worker has not benefited to any major extent from German’s economic and industrial success. There was a time when German trade unions were very powerful, and average wages rose very much in line with the growth of the economy. But changes made to employment law by Helmut Kohl in the 1990s greatly reduced the power of the unions, and since then German wage growth has been pretty modest.
Because of the strength and wealth of the German economy, many analysts believe that the German consumer is a potentially powerful economic force which is being held back by the excessive conservatism of both industry and government. They argue that Germany needs to share its success by granting bigger wage increases to its workers and cutting taxes. The belief is that if more money can find its way into the pocket of the average German consumer, he or she will buy more French wine, Belgian chocolates and Irish whiskey, and take more holidays in Italy or Spain.
So far Germany is not getting the message. From an economic perspective it is a highly conservative country with a strong emphasis on saving for a rainy day, and doesn’t understand or approve of the more spendthrift habits of many other European countries. It is the only euro zone country which has consistently opposed the low (or negative) interest rate policies of the ECB, because of the impact it has on savers. Unlike in most other countries, it is German savers rather than borrowers who receive most of the public and political sympathy. There is no doubt that Germany is going to come under increasing pressure to loosen its purse strings and help out its neighbours, but this would involve a major change in the German economic mindset, and there is no indication that it will happen any time soon.