German voters, the euro, and government spending

Last year, the great and the good were repeatedly found advocating that Germany should increase government spending, and hence public debt, to boost demand across the eurozone.  It was consistent with a line that has echoed round the commentariat for the last five years, that somehow demand in Germany needed to be boosted.

From the scale of the unemployed resources across the euro-area it is pretty clear that, in the abstract, a boost to demand would be helpful.  But fiscal policy is national, and it was never clear to me why German voters would regard additional spending and debt as a “good thing”; something worth supporting at the ballot box.

To me, the chart below helps explain why a sensible German voter might reasonably be averse to expansionary fiscal measures.  Not only is the German unemployment rate low but Germany has been doing relatively better economically than it did in the half decade or so prior to the 2008/09 recession, but Germany’s public debt doesn’t look so good in international comparisons.

The IMF World Economic Outlook database has data on net government debt as a percentage of GDP.  Germany is in blue.  The other lines represent two other broad groups of European countries German voters might compare Germany with.  The green line is the median of net debt to GDP for France, Spain, Italy, Greece and Portugal.    And the red line is the median of the other Germanic/Nordic countries: Austria, Switzerland, Netherlands, Denmark, Norway, Finland, and Sweden.  For that latter group, median government debt has been lower than that in Germany for the whole of the last 20 years.  German voters might reasonably conclude that the Northern European route was more attractive than the Southern, on this count as well as others (including good governance, low levels of corruption etc).

German debt

Of course, it might be different if German voters for some reason put the interests of the euro area ahead of those of Germany. But, much as the elites might wish it otherwise, there is no sign of that happening. Politics is mostly national, even in the euro area.

3 thoughts on “German voters, the euro, and government spending

  1. Dear Sir,

    you are quite right but I would stress the point you are making in the last paragraph even more. The EU is not a nation state. For a Med European, it is quite reasonable now to ask Germany to help lift the whole Eurozone out of the mess that it is in. After all, the economic disaster that has been unleashed on Spain, Greece, Portugal and Ireland is to a large extent due to the very low interest rates these countries had to accept at the introduction of the Euro when the German economy in particular was not doing too well.

    The Germans, of course, see things differently and do not want to incur any more debt or accept an uptick in inflation, always a sensitive topic in that country, to help out ‘profligate’ Southern Europeans. Part of the problem is that the press and media in countries like Germany have never done a good job at explaining the economics underlying the Euro or, indeed, the situation Germany faced a few years ago when it was agreed to provide financial support to the PIGS. Germans therefore might view any calls for Germany to do more as others wanting to take away their hard earned Euros. They did not take that view when they were being asked to pay an extra tax to fund the reconstruction of the former East Germany. People grumbled but accepted that it had to be done. East Germany, of course, was seen as part of a reunified Germany. The rest of the Eurozone is not a part of Germany.

    One more thing. I have never quite got the argument that expanding demand in Germany will automatically help Southern Europe. For that to happen, you have to have a product that people want to buy. Simply expanding demand in Germany without sorting out the structural economic problems in the affected countries might not be much help at all. What happens if Germans simply decide to spend the extra money on German-made cars or holidays in Germany or Scandinavia? And even if it does boost demand for products from those Southern countries, to the extent that it is temporary, it could actually impede the structural changes needed in those economies and have long term costs.


  2. Nice post. But doesn’t German public debt seem very manageable when compared for example with public debt in the US and UK? And these debt levels in the context of the macroeconomic shock have had modest effects.

    And the rather modest public debt is in the context of a German state having a once in a generation shock of the integration of east Germany following reunification – a shock which theory suggests should be spread over generations in the form of higher debt. But debt remain rather stable.

    Perhaps more importantly than the public debt position is to look at the NIIP. Germany’s positive net international investment position (NIIP) was reduced to close to balance in the years following reunification. Since the beginning of the millennium, the NIIP recovered and reached 48 percent of GDP at end-2013 (from the IMF’s 2014 external sustainability report). While I agree the politics are challenging it comes down to a judgment about whether more active fiscal policy (or a genuine sharing of banking risks) is a required part of making the current Euro area macroeconomic adjustment work more smoothly – and perhaps more sustainably?


    • Three brief thoughts Mario:

      Demographics (ie prospective growth in nominal GDP) looks much worse in Germany than in the US (in particular) or the UK, so the level of debt one might willingly carry is probably lower. Of course, all these comparisons are fraught because the debt numbers we usually quote don’t take account of lots of (near-contractural) public employee pension liabilities. Those are huge in the US and UK, and I’m not sure what the situation in Germany is like.

      Agree it made sense for Germany to increase public debt post 1990, but that is now 25 years ago. Perhaps the Germans shouldn’t be uncomfortable with public debt around 60% of GDP, but the debate now is whether they should risk taking that much higher (in a climate where break-up risk, which could crystallise the ECB’s large debts to the Bundesbank, remains real)

      I agree with your final point – it comes to a judgement, but ultimately that has to be voters’ judgement. I suspect the German public might prefer the DM back, especially if presented with the implications of making the euro work well might be.


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