Germany must ditch its fiscal caution to help avert a global recession

With European growth in the doldrums, German leaders are under pressure to drop their no-deficit rule and provide some much needed stimulus to the ailing economy.

In a year in which overall European Union growth dropped to its lowest rate since 2013, German growth shrank and its economy is now on the brink of recession.

Economists say the Germans are paying the price of United States President Donald Trump's trade war on China that has damaged the growth of the world's leadings exporters.

Germany also faces the potential impact of a disorderly United Kingdom exit from the European Union.

The Frankfurt-based research company Sentix this month found that German investors are now at their most pessimistic since the global recession a decade ago.

The Bundesbank, Germany's central bank, has blamed both Brexit and the trade war for a fall in orders for the cars and industrial equipment that have been the basis of Germany's economic dominance within the EU.

Germany is China's biggest European trading partner by far and, as one of Berlin's top diplomats Wolfgang Ischinger recently told an interviewer: "Our China policy had one key component: how can we sell the largest possible number of German automobiles in China."

Despite the current challenges, Chancellor Angela Merkel's coalition government is sticking stubbornly to its zero deficit policy in the face of domestic and international calls for it to loosen the fiscal strings.

Germany's "schwarze null" or black zero policy has been an article of faith among successive governments. But a growing chorus of politicians and economists now argue that it is a doctrine that is holding back investment in industry and infrastructure.

"It has become an end in itself," according to Michael Huther, head of the German Economic Institute.

Foreign critics of the German policy include the US and also France, whose economy is holding up rather better than its neighbor.

Bruno Le Maire, the French finance minister, last month called on Germany to invest more in the eurozone. "Germany has to invest and do it now, the sooner the better," Le Maire told a business forum, warning: "We must not wait until the economic situation worsens to make the necessary decisions."

Despite the US role in generating the trade conflict that has in part led to Germany's current difficulties, even the White House has weighed in with unsolicited advice on what Germany should be doing.

Trump's economic adviser Larry Ludlow said Chancellor Merkel "should be cutting tax rates, individual and corporate tax rates, and deregulating to get their economy moving again".

From a more liberal perspective, the US economist Paul Krugman has accused Germany of "a ruinous obsession over public debt" and said the costs of it were spilling over to the rest of the world.

During a post-2008 period in which austerity dominated Western economic policymaking "Germany forced debt-troubled nations in southern Europe into punishing, society-destroying spending cuts; but it also imposed a lot of austerity on itself," Krugman wrote in the New York Times.

Given low and even negative interest rates, European governments, and Germany in particular, should stimulate their economies by borrowing and increasing spending, according to Krugman.

German policymakers are somewhat constrained by a debt brake that has been enshrined in the constitution for the past decade. The law effectively bans regional governments from running budget deficits and limits the federal deficit to 0.35 percent of gross domestic product.

Fiscal stringency was brought in to balance the books after the huge costs Germany had to bear with the reunification of the country in 1990. The debt brake was adopted later, in the wake of the 2008 financial crisis.

Thanks to a booming economy since then, tax receipts grew and Germany recorded a 54 billion euros ($59.5 billion) surplus last year. Given the proven success of the policy, leaders of Merkel's coalition are reluctant to take their foot off the fiscal brake despite today's changed circumstances.

Abolishing the debt brake would mean revising the German constitution. However, economists believe there is still room for maneuver to stimulate investment.

Economics commentator David Brown, who heads the New View Economics consultancy, believes the present German slowdown threatens the whole of Europe as it confronts the twin challenges of a trade war and Brexit.

"Germany needs to take a lead," he wrote recently. "If Germany is questioning the need for extra monetary stimulus, then it should be prepared to recycle its budget surplus into speeding up recovery prospects for the rest of Europe."

Amid the continuing threat to the global economy posed by Trump's trade war, the World Trade Organization has just cut its forecast for trade growth for this year and 2020.

A growing number of experts are now hoping that Germany, the world's fourth largest economy and the biggest in the EU, will ditch its current fiscal orthodoxy and do more to play its part in averting a potential global recession.

Harvey Morris is a senior media consultant for China Daily UK.