Can green investment help relaunch Germany’s economy?

Activists look on as policemen prevent other environmentalists to march further after they managed to enter the Hambach lignite open pit mine near Elsdorf, western Germany, during a protest of environmentalists against fossil-based energies. (AFP)
Updated 19 September 2019

Can green investment help relaunch Germany’s economy?

  • The German government has so far shown little willingness to change its stance

FRANKFURT, Germany: A recession looms for Germany and the European Central Bank is pleading for governments to spend more to revitalize economic growth. Yet despite having the luxury of borrowing money for less than nothing, the German government is keeping a tight rein on its finances.
A debate over Germany’s devotion to budget austerity is intensifying as the outlook for the economy dims and public pressure grows to address big issues such as global warming. On Friday, the government will unveil a raft of measures that could include billions in incentives and spending to make the economy more environmentally-friendly.
“The call for fiscal stimulus has never been louder,” said Carsten Brzeski, chief economist for the bank ING Germany. “And this week will show whether the eurozone country with the deepest pockets finally plans to empty them.”
The slowdown in growth across Europe, blamed largely on the US-China trade conflict and uncertainty about Brexit, is putting a sharp focus on Germany’s devotion to the so-called “Schwarze Null,” or “black zero,” which refers to the policy of balancing the budget — the zero — with at least a small surplus to keep it in the black.
The debate over government spending policy affects the entire 19-country eurozone, since more government outlays by Germany and other fiscally sound countries such as the Netherlands could help support growth by building new infrastructure, such as roads, rail lines or high-speed Internet, or by gathering less in taxes.
The German government has so far shown little willingness to change its stance. It has ignored repeated pleas from the head of the European Central Bank, Mario Draghi, who said last week it was “high time” for government spending to take over as the main tool of economic policy. The central bank announced interest rate cuts and bond purchases in an attempt to ward off a downturn.
The government argues it’s important to reduce debt while the economy is growing and not to burden future generations. German Finance Minister Olaf Scholz submitted a balanced draft budget of 360 billion euros ($400 billion) for 2020 last week and Chancellor Angela Merkel said in a speech before the German Taxpayers’ Federation that the government was sticking to its balanced budget, “not as a goal in itself, as we are often accused of doing, but because clear economic reasons and fairness aspects argue for that.”
Merkel noted that Germany’s total debt would fall below 60% of gross domestic product — the limit for countries that use the euro — for the first time since 2002. The German constitution itself sharply limits deficits to 0.35% of GDP except in a crisis, yet the government’s surpluses go well beyond that requirement.
While the German government may not be giving up on balanced budgets, there are signs it is at least easing up the zeal with which it amasses surpluses.
Last year’s surplus of 1.9% of GDP has fallen to 1.4% this year and is expected to hit 0.9% next year — meaning that the government is already providing some fiscal stimulus. Germany’s economy shrank 0.1% in the second quarter and underlying figures are pointing to another quarter of contraction, which would put the country in a technical recession.
It is striking that the government refuses any new borrowing at a time when it can do so at negative interest rates — meaning it would get paid back more than it borrows. German 10-year bonds currently yield minus 0.48%, and the government was able to sell a 30-year bond at a negative interest rate in August.
Marcel Fratscher, the head of the German Institute for Economic Research in Berlin, has called the balanced budget a “false fetish.” His institute has argued that Germany needs to invest in long-term modernization projects such as extending digital services in rural areas.
The president of the Federation of German Industries, Dieter Kempf, said in an interview with Der Spiegel that “it’s worth considering sensible use of the space,” allowed by the constitution to fund more investment.
The calls to spend are not coming only from those concerned about the economy, but also climate activists who say more needs to be done to shift the world economy from carbon-intensive industries and consumption. Public pressure has only grown after the country witnessed its hottest summer on record and the opposition Greens party made big gains in elections to the European Parliament and in domestic polls.
On Friday, the government is expected to unveil a package of incentives aimed at reducing carbon dioxide emissions from homes and autos so that Germany can meet its goals under the 2015 Paris climate accord. Possible measures include incentives to replace old heating systems or to purchase battery-powered autos. A report in Die Welt newspaper said the government was considering measures totaling some 40 billion euros ($44 billion) through 2023.
Brzeski said such a program “would not be enough to stop the slide of the economy toward recessionary territory, but it could be an important cornerstone in Germany’s recovery and its quest for a new economic model.”
Spending on that level would only be “a slow-motion stimulus” since it will take time to roll out, said Holger Schmieding, chief economist at Berenberg bank.
“It will add up over time and support domestic demand,” he said. “However, the German stimulus will not be a European, let alone a global, game changer.”


OECD forecast sees global growth at decade low

Updated 22 November 2019

OECD forecast sees global growth at decade low

  • Governments failing to get to grips with challenges, outlook says

PARIS: The global economy is growing at the slowest pace since the financial crisis as governments leave it to central banks to revive investment, the OECD said on Thursday in an update of its forecasts.

The world economy is projected to grow by a decade-low 2.9 percent this year and next, the Organization for Economic Cooperation and Development said in its Economic Outlook, trimming its 2020 forecast from an estimate of 3 percent in September.

Offering meagre consolation, the Paris-based policy forum forecast growth would edge up to 3 percent in 2021, but only if a myriad of risks ranging from trade wars to an unexpectedly sharp Chinese slowdown is contained.

A bigger concern, however, is that governments are failing to get to grips with global challenges such as climate change, the digitalization of their economies and the crumbling of the multilateral order that emerged after the fall of Communism.

“It would be a policy mistake to consider these shifts as temporary factors that can be addressed with monetary or fiscal policy: they are structural,” OECD chief economist Laurence Boone wrote in the report.

Without clear policy direction on these issues, “uncertainty will continue to loom high, damaging growth prospects,” she added.

Among the major economies, US growth was forecast at 2.3 percent this year, trimmed from 2.4 percent in September as the fiscal impulse from a 2017 tax cut waned and amid weakness among US trading partners.

With the world’s biggest economy seen growing 2 percent in 2020 and 2021, the OECD said further interest rate cuts would be warranted only if growth turned weaker.

China, which is not an OECD member but is tracked by it, was forecast to grow marginally faster in 2019 than had been expected in September, with growth of 6.2 percent rather than 6.1 percent.

However, the OECD said that China would keep losing momentum, with growth of 5.7 percent expected in 2020 and 5.5 percent in 2021 in the face of trade tensions and a gradual rebalancing of activity away from exports to the domestic economy.

In the euro area, growth was seen at 1.2 percent in 2019 and 1.1 percent in 2020, up both years by 0.1 percentage point on the September forecast. It is seen at 1.2 percent in 2021.

The OECD warned that the relaunch of bond buying at the European Central Bank would have a limited impact if euro area countries did not boost investment.

The outlook for Britain improved marginally from September as the prospect of a no-deal exit from the EU recedes.

British growth was upgraded to 1.2 percent this year from 1 percent previously and was seen at 1 percent in 2020.