Why Germany badly needs structural reforms and looser fiscal policy

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“Business dynamics in Germany have waned.”

The much-anticipated annual report of Germany’s Council of Economic Experts published on Wednesday can be summed up this year in these six little words.

It will make for some gloomy reading in Berlin, as the five economists tasked with advising the government lay out the need for serious structural reforms in a country that hasn’t done much in this respect in the last two decades as growing trade protectionism and the digital revolution has disrupted industries.

The council has cut its growth forecast, as other institutions have before. It sees Germany’s GDP up 0.5% this year – putting the country at the bottom of the European league – and a paltry 0.9% in 2020.

Germany’s third quarter GDP data is due on November 14 and many economists expect another slight contraction. The country’s export-focused economy has been hit by the US-China trade war, uncertainty over Brexit, and a decline in the car industry due to new emissions rules and the shift to electric vehicles.

To tackle the German economy’s challenge, the government should pursue a moderate fiscal stimulus in the short term and fundamental structural reforms for the longer term, the experts say.

To begin with, Berlin should scrap the so-called “Black Zero” rule that forces the government to balance its budget every year, the report insists. This has led this year to the absurdity of a budget surplus since 2014 which hit 1.7% of GDP last year even as economic growth has slowed.

For fiscal restraint, the experts argue that there is another, constitutional rule called the debt brake that limits structural budget deficits to 0.35% of GDP: That should be enough to help boost the economy.

But Germany’s longer-term problems are more serious. Weak productivity growth, a decline in entrepreneurial spirit, need to be addressed by a boost of public investment that would create a “reliable economic policy framework with elements such as a functioning infrastructure and complementary public spending, in areas such as education.”

It is usually the role of such advisory panels to remind governments of all the good things they should do, and could if only they didn’t have to court voters. This year’s council report helps underline the apparent political paralysis at the top of the German coalition government.

The agreement clinched in early 2018 by the SPD social-democratic party and Angela Merkel’s conservative CDU apparently hadn’t planned for such a prolonged economic slump. And the current political uncertainty in Germany, with traditional parties challenged by the far right and Green parties, isn’t a favorable environment for serious economic reforms.