ATHENS – Following the publication of the International Monetary Fund’s latest World Economic Outlook, high-profile economists like Olivier Blanchard, Larry Summers, Mario Monti, and Reza Moghadam have come out in favor of revising the eurozone’s fiscal rules to allow for public investment aimed at accelerating its economic recovery. They argue that, given record-low borrowing costs of about 1%, increased capital spending by governments would effectively amount to the proverbial “free lunch,” yielding sufficiently high tax revenues that the debt/GDP ratio would not rise. So why do German officials refuse to get on board?
It is no secret that Germany is deeply committed to upholding strong fiscal rules within the currency union. Its focus on “discipline” reflects, first and foremost, a predisposition embedded in Germany’s culture and universities to link economics with moral philosophy. Economic behaviors like thrift and avoidance of debt are desirable, because they are consistent with ethical standards of personal behavior.
Moreover, Germans are not convinced that Keynesian policies, with their focus on boosting aggregate demand, are particularly effective in influencing long-term economic trends, despite their obvious short-term impact on output and employment. The prevailing view in Germany is that post-recession growth can more likely be attributed to structural reforms that increase productivity and bolster competitiveness.
But such reforms, the Germans believe, necessarily entail social costs, making them unpopular and difficult to execute. Only when fiscal austerity is implemented (or at least threatened), and a population is faced with rising unemployment and widespread economic misery, is a country motivated to pursue them. When austerity is relaxed and the threat is removed, discipline weakens and the drive to reform is lost. Italy’s behavior under former Prime Minister Silvio Berlusconi is frequently cited as an example of this dynamic.