The observation that the eurozone is unsustainable does not lead ineluctably to a forecast that it will necessarily break apart. But there are events that greatly increase the likelihood of that outcome.

Last week’s German budget is one of them. Olaf Scholz, Germany’s new Social Democratic finance minister, has proposed a budget with the following characteristics: a nominal cut in investment; a reduced ratio of defence spending to gross domestic product; a freezing of funds for development aid at 0.5 per cent of GDP; and a lower contribution to the next EU budget than what he himself had previously suggested.

The budget fulfils two narrow goals instead. It ensures that the government will run a fiscal surplus through the 2019-2022 budget period. And in 2019 Germany’s debt as a percentage of GDP will fall below the 60 per cent threshold set out in the EU’s Maastricht treaty.

Mr Scholz’s ambition is to push the budget into a surplus of 1 per cent of GDP or higher. Such a surplus would, over time, eradicate all public debt. At that point Germany will have reached ordo-liberal utopia: it will have become like Nicolae Ceausescu’s Romania, which boasted a surplus of $9bn in 1989, just before the dictator was overthrown.

Beyond the negative consequences for Germany itself, this budget will exacerbate the eurozone’s already significant imbalances.

Germany has been running current account surpluses of around 8 per cent for the past couple of years. According to a news report by Der Spiegel, the country’s air force has become dysfunctional as a result of chronic under-investment. Chancellor Angela Merkel, who supports the budget, has been less than honest with her repeated commitment to the Nato defence spending target of 2 per cent of GDP.

There is a rather simple solution to all of these problems: run a moderate fiscal deficit, say 2 per cent of GDP, invest in the restructuring of the country’s military capacity, replenish public infrastructure and encourage high-tech projects. This would help Ms Merkel counter accusations by US president Donald Trump that Germany is not pulling its weight in Nato. It would make Germany and the EU less of a target for US trade tariffs by reducing Germany’s and the eurozone’s external savings surplus. And it would strengthen Germany’s long-term growth potential. It is not often you can do so much with one policy.

To do this would be to breach the constitutional “debt brake” — a fiscal rule that forces Germany to run a nearly balanced budget over the economic cycle. However this is an internal choice, not an external constraint. Mr Scholz is not just following rules here. He is doing more than he needs to. The SPD is returning to its pre-Keynesian roots.

I care less about the self-destruction of the SPD than about the externalities. The Germans made a choice. They will get what they voted for. But the policy will affect millions of people who did not have a vote because the budget will set the path for the rest of the eurozone.

In particular, it will constrain the degree of fiscal flexibility the EU could grant to countries during an economic downturn. Italy, for example, desperately needs more public investment, in addition to economic reforms, as a way out of economic stagnation.

Voters have been turning away from the established parties, a trend likely to continue unless there is a sustained economic recovery.

France is in a better position, but not strong enough to follow Germany either. We may marvel at Emmanuel Macron’s rise to the presidency, but the far-right National Front remains a danger both to him and the eurozone.

There will never be a solution to the eurozone’s predicament unless other countries speak truth to power. They should deem Germany to be violating the most important policy rule set out in the Maastricht treaty: that member states treat economic policy as a matter of common concern. The German budget is as un-European as Greece’s excessive fiscal deficits were.

There is only one rational explanation for such a policy. Getting rid of your own debt is a way to end the debate about risk sharing in the eurozone. But copying Ceausescu’s economic strategy is a rather extreme way to go about this.



munchau@eurointelligence.com

Letter in response to this column:

Germany mirrors economies closer to home / From George Horsington, Edlibach, Switzerland

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