10 Leaders The EconomistAugust 24th 2019
n august 19ththe 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 Ger-
many 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 be-
There are arguments to be made against
higher deficits when economies weaken and in-
flation is low. Spending can be unaffordable be-
cause the government is already too indebted.
Some critics argue that it is up to central bank-
ers, not finance ministers, to cope with the eco-
nomic cycle. A worry is that more borrowing willdriveupinter-
est rates, deterring private-sector investment.
None of these applies to Germany. Stimulus is patently af-
fordable. The government can borrow for 30 years at negative in-
terest rates. As a result, it could probably spend double what Mr
Scholz suggests for years and still keep its debt-to-gdpratio
steady at around a prudent 60%. Central bankers are hamstrung.
Short-term interest rates cannot fall much further. The Euro-
pean Central Bank is likely to start buying more assets in Septem-
ber, 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 (see
Buttonwood). 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. Al-
though unemployment is just 3.1%, the Bundes-
bank has warned that joblessness could soon
rise. The domestic economy cannot endure bru-
tal global trading conditions for ever.
It would be better to use fiscal policy to pre-
vent 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 prema-
ture, the worst that could happen is slightly
higherinflation than today’s 1.1%—which would in any case help
the ecb hit its inflation target of close to 2%. A little more infla-
tion would also even out imbalances in competitiveness be-
tween 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 immedi-
ate, temporary boost, such as payroll-tax cuts, designed to fore-
stall a downturn. Germany stands to benefit from both prongs of
this strategy. Continuing to reject them is fiscal folly. 7
The case for more fiscal stimulus in Germany is overwhelming. Here is how to do it
% change from previous quarter
2016 17 18 19
would be an act of corporate self-immolation.
Cathay is far from alone. It joins a list of foreign firms that
have wound up on the wrong side of politics in Beijing. Often the
remedies are relatively simple, if nauseating. A series of luxury
brands—Versace, Coach and Givenchy—have recently offered
profuse apologies for selling t-shirts that appeared to identify
Hong Kong as being separate from China (see Chaguan).
As a general rule, the more foreign companies prize China’s
market, the more they have to fear (see Business section). hsbc,
Europe’s biggest bank, has come under pressure for sharing in-
formation with American authorities that helped them build a
fraud case against the chief financial officer of Huawei, a Chi-
nese telecoms giant. With its strategy predicated on growth in
China, hsbccannot afford to become a villain there. This month
it ousted both its chief executive and the head of its China unit,
though it denied any connection with the Huawei controversy.
Cathay’s predicament shows why global boardrooms are
growing more anxious about Chinese anger. The main worry
used to be consumer boycotts, fuelled by state media. These
harmed Japanese carmakers and South Korean retailers, but
their Chinese sales typically recovered after a few quarters.
The attack on Cathay went further. China’s airline regulator
declared it unsafe, the international arm of icbc, a bank, recom-
mended selling its shares and citicBank boycotted it. The bogus
regulatory warning gave all Chinese firms a pretext to shun it.
These entities are not household names outside China but are
active around the world. icbcis the planet’s biggest bank by as-
sets. citicBank belongs to one of the most global of Chinese
state conglomerates. Their participation in the flagellation of
Cathay is a reminder that their ultimate loyalty is to the party.
Using state firms as battle spears gives the lie to China’s claim
that it is managing them according to market principles. And
weaponising regulators undermines China’s ambitions to play a
bigger international role. The airline supervisor had earned re-
spect in leading the charge to ground the 737 max, Boeing’s trou-
bled aeroplane; its Cathay warning makes it look like a political
hack. The party may well get foreign companies to toe its line on
Hong Kong. In the process it is revealing its true nature. 7