In my humble opinion, the third option is akin to a slow-developing cancer and is not responsible for Germany’s current malaise (though it must be galling for German taxpayers that they bear the biggest share of the cost for European institutions).
So that leaves the country’s fiscal mess and energy mess as the two areas that need immediate attention.
Well, Germany just had an election and a new coalition government has announced its economic agenda. But the parties did not choose spending restraint or more energy production.
Instead, as reported by the U.K.-based Economist, they are going to make government bigger.
I’m not joking. Here are some excerpts.
For years, Germany’s aversion to debt has been a millstone, leading to crippling underinvestment…and weighing down both the domestic economy and that of Europe as a whole. …Friedrich Merz, who won Germany’s election on February 23rd, has just.. revealed plans for two changes to the debt brake, a constitutional provision in place since 2009 that lets the government run only minuscule structural deficits. …The first reform will establish a brake-exempted infrastructure fund of €500bn ($535bn) over ten years, a boost worth around 1% of GDP each year. This should get the economy moving… Mr Merz’s second proposal…is to exempt any defence spending beyond 1% of GDP from the debt brake altogether. …And there may be more to come. The potential new coalition is also talking about further reforms to the debt brake, which implies yet more spending on other underfunded areas.
It’s baffling that this dirigiste agenda is labeled “a fantastic start,” but it reminds me of columns I wrote in 2016 and 2022 referring to “anti-economics from the Economist.”
The magazine either is relying on journalists to cover economics, or it is hiring the wrong kind of economists.
Here’s the right way to think about German fiscal policy.
If Chancellor-to-be Merz had proposed to reduce the burden of government spending by 6 percent of GDP (like Javier Milei did in his first year), that would be a “fantastic start.”
If Merz had proposed to reduce domestic spending by 6 percent of GDP and then boosted both infrastructure and defense spending by 1 percent of GDP, that would be a good start.
If Merz had proposed to reduce domestic spending by 2 percent of GDP and then boosted both infrastructure and defense spending by 1 percent of GDP, that would be a mediocre start.
But since Merz simply proposed more spending – in a country where government already consumes nearly 50 percent of economic output, that’s a very bad start.
I can’t resist sharing a couple of additional sentences from the article.
Because the debt brake is a constitutional provision, amending it requires a two-thirds majority in the Bundestag. …So the changes need to be made right now, before the new parliament is sworn in on March 25th. It is highly unorthodox, not least because Mr Merz said nothing about it on the campaign trail.
One suspect that a campaign slogan of “Make Germany into Italy” would not have been very popular, so I guess we should not be surprised he waited until after the election to put government first and taxpayers last.
I suspect Merz’s next unpleasant surprise will be tax increases. That will make the IMF happy but lead to further stagnation for Germany.
P.S. This is one of the reasons I always cite the Swiss debt brake as a role model. It functions as a spending cap and is far superior to the weak (and soon-to-be eviscerated) German version.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
