Fiscal policy: from macro control to a balanced budget
Germany’s fiscal policy, much like its monetary policy, has been geared more
towards sustainability than most other European states. Although a number of
smaller developed economies have government debt to GDP ratios lower than
Germany’s 70%, the country’s debt burden is moderate in comparison with other
major industrialised nations (UK 90%, France 95%, Spain 100%, US 105%,
Italy 130%, Japan 250%).
Germany’s sovereign debt position would be even more enviable by
international comparison were it not for the increase in its government debt
between 1960 and 2000 on account of two primary factors. The first was the
Keynesian approach to overall demand management pursued in the 1970s
which ended in stagflation. This coupled with the negative impact of the oil
crises of that decade, caused public-sector debt to double. The second factor
was reunification. Up to EUR 2 tn of public money flowed to East Germany to
finance social support and the structural changes required following the demise
of its industrial sector. This resulted in German debt to GDP rising a further
20 percentage points.
More recently, German public debt briefly rose above 80% following the 2008
financial crisis as the state came to the aid of the banking sector. Debt has
come down substantially since then, helped in large part by more than
EUR 100 bn of savings in the state sector resulting from the ECB’s low-interest-
rate policy. If the recent trend continues, Germany’s debt by the end of this
decade could fall below 60%, the marker laid out in the Maastricht Treaty.
By contrast, for the eurozone as a whole the government debt ratio, at 90.4%,
fell only slightly in 2015 and even this was the first decline in many years. Even
in America public debt looks likely to increase significantly following the
upcoming change of administration.
Germany’s relatively robust fiscal policy gives the state room for manoeuvre,
which has proved particularly helpful in its response to black swan events. In the
recent crisis, for example, Germany was able to step in with guarantees for
other eurozone countries without forfeiting its own top-notch credit rating.