Germany boasts first balanced budget in 45 years

Euro zone’s biggest economy calls on partners to follow its austere example

The mood of self-congratulation in Berlin over the balanced budget makes any easing of fiscal policy seem unlikely, even though the German economy is expected to slow this year.

The mood of self-congratulation in Berlin over the balanced budget makes any easing of fiscal policy seem unlikely, even though the German economy is expected to slow this year.

 

Germany boasted on Tuesday it had balanced its budget for the first time since 1969 and pressed euro zone partners to follow its austere example rather than try to stimulate their stagnant economies with borrowing or central bank money-printing.

Berlin had been aiming to achieve the so-called “schwarze Null” (zero deficit) in 2015, but strong tax revenues and lower debt service costs due to rock-bottom interest rates helped it meet the goal a year early in 2014, the finance ministry said.

Chancellor Angela Merkel’s government has rebuffed calls from EU partners led by France and Italy and international organisations such as the IMF and the OECD to spend some of the fiscal windfall on growth-promoting public investment.

The announcement came nine days before the European Central Bank may decide to launch large-scale purchases of euro zone government bonds in an effort to boost growth and avert deflation in the 19-nation currency area.

Headline inflation fell below zero in December, and core inflation, excluding energy and food, was stuck at 0.7 per cent, far below the bank’s target of just below 2 per cent. Persistent low inflation makes it harder for highly indebted governments and households to reduce the burden.

Germany’s influential Bundesbank and conservative financial establishment oppose so-called quantitative easing (QE) - creating money to buy securities and stimulate the economy.

They question the need for monetary stimulus at a time when falling oil prices are bringing an economic boost, and argue that buying government bonds raises legal and moral hazards, and could bring future losses for German taxpayers.

The mood of self-congratulation in Berlin over the balanced budget made any easing of fiscal policy seem unlikely, even though the German economy is expected to slow this year.

Far from using the leeway to invest more in creaking public infrastructure or cut taxes to stimulate weak domestic demand, politicians in Ms Merkel’s conservative CDU party said the government should now focus on paying down the country’s debt.

CDU deputy parliamentary floor leader Michael Fuchs told Handelsblatt that Germany still had huge a debt pile to clear currently at around 75 per cent of GDP, and needed to keep saving as a duty to future generations.

CDU general secretary Peter Tauber said the “historic success” sent a clear signal to the rest of Europe that Berlin was leading by example and spending only money in its coffers. “This marks a turning point in financial policy: We’ve finally put an end to living beyond our means on credit,” he said.

Germans still harbour deep-seated fears of inflation due to the hyperinflation of the 1920s that wiped out an entire generation’s savings, and many have an aversion to debt.

Christian Schulz, economist at Berenberg Bank, said the government had staked a lot of credibility on balancing the budget and would reap a political dividend from voters “who are very keen on the German government not borrowing more”.

While more spending could boost domestic demand and imports from the rest of Europe, Mr Schulz said it was unlikely to be at levels that could significantly affect euro zone growth.

Reuters