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Obsessed with austerity

Christoph Hasselbach / esOctober 21, 2014

The German government sees itself as a fiscal role model for the rest of the European Union. But Finance Minister Wolfgang Schäuble's dream of a balanced budget may not be the answer.

NATO Gipfel in Wales 05.09.2014
Image: Leon Neal/AFP/Getty Images

The already meager growth in Europe is slackening yet again. The fear of a new recession has returned, though many had hoped the crisis was over. Now the old debates over the best policies are back. On the one hand are countries like France and Italy, who want to save less and drive growth with targeted government investment. On the other side: Germany, but also the UK, the Netherlands, and Finland. These nations believe that the best way out of the crisis is through balanced budgets and more competitiveness.

Political extremism as leverage

To handle the current situation, Europe must "invest in growth… and focus not only on rigidity and economy" said Italy's social democratric Prime Minister Matteo Renzi. In the end, he argued, the old austerity measures brought no solution. French President François Hollande, also of the center left, agrees: "There is uncertainty everywhere. The economic situation in the United States is ebbing, and Europe has not yet found a way back to growth, and growth is what I'm fighting for."

French Economy Minister Emmanuel Macron warned in the Frankfurter Allgemeine Zeitung daily of a recession as in the 1930s: "We should learn from those mistakes, the political consequences were disastrous at that time," he said, alluding to the rise of National Socialism in Germany.

But today, Macron has to worry about a similar movement at home. In France, Marine Le Pen of the National Front is busy advertising the far-right with a simple recipe of isolationism and xenophobia.

EU Parlamentswahl 25.05.2014 Marine Le Pen
Marine Le Pen has spearheaded campaigns against leftist causes like gay marriageImage: picture-alliance/dpa

France is paralyzed

In fact, France has to save a considerable amount in order to bring its budget deficit under the limit of three percent stipulated by the European Stability Pact. It is now well over four percent. The EU Commission could theoretically force the country to adopt a saving strategy if it saw fit to do so.

In 2013, France came up against this rule and asked for two years to adjust. Now the French government is calling for a further two-year delay. Guntram Wolff, director of the Brussels think tank Bruegel, is very much in favor of relaxing European austerity policies, "because we are still living in extraordinary times." New debt is necessary, but it's manageable because interest rates are relatively low.

But the only countries who should follow this path are those that have financial leeway to do so, like Germany. France, however, must "gamble a lot of trust" because it "has done relatively little" in the two-year deferral period. Wolff says the Commission must be willing to compromise once again - they must "combine flexibility in the interpretation of the rules with strict conditions," he said.

Schäuble should forget the big black zero

But even if only economically and fiscally stable nations spend more money, the question remains as to how they should spend it. If it flows into consumer spending, the state often experiences a flash in the pan without any real impact. This is exactly what happened to France in 2009-10 - Wolff differentiates between this and productive investment: "If I repair a bridge, this is a good investment, because then I need to replace less shock absorbers in the next few years and you have less congestion. If all I do is increase pensions, that is not forward-looking, but rather a step backwards."

USA Deutschland IWF Treffen in Washington Finanzminister Wolfgang Schäuble
Finance Minister Wolfgang Schäuble dreams of the first balanced budget since 1969Image: Reuters/J. Roberts

But German Finance Minister Wolfgang Schäuble is even stingy with sustained investment. If he has his way, Germany's federal budget could soon manage without any new debts for the first time in decades. With the so-called "black zero," - i.e. a balanced budget - the German federal government wants to give a sign that Europe is holding on to consolidation despite adverse conditions.

But Wolff is skeptical: "The black zero is not important as a sign. It is also hardly justified in the current economic situation. It is more of a political goal."

Structural reforms more important than deficit figures

Politicians from the northern nations have been preaching for years that not everything depends on budget figures. The real issue is competitiveness, and to improve it usually does not cost money. But Wolff added: "Even more important than the deficit rules are structural reforms."

Spain is an example of how a country really needed structural reforms in the first place. But it's a hard journey, and it usually has a political price. Many critics say the Merkel government has also been quite cowardly in this regard. It has benefited from reforms of the previous government, while introducting reforms like the mothers' pension, minimum wage, and early retirement options.

It's up to the voters whether competitiveness is flagging under all this pressure. Germany's reputation as a role model hasn't proven it one way or the other yet.