The economy needs both permanently higher investment and a temporary boost
the Bundesbank warned that Germany could soon be in recession. The economy shrank in the second quarter of the year; two consecutive quarterly contractions are often taken to define a downturn. In June industrial production was 5.2% lower than a year earlier, the biggest fall in a decade. Some investors hope that the run of bad news will persuade Germany to overcome its deep-rooted suspicion of fiscal stimulus.
The country needs looser fiscal policy in both the long term and the short term. It has neglected infrastructure in pursuit of needlessly restrictive fiscal targets, most recently its “black zero” ban on deficits. This has, for example, left 11% of its bridges in poor condition and its railways plagued by delays. Germany should replace the deficit ban with a rule allowing borrowing for investment spending.
It would be better to use fiscal policy to prevent a deep downturn than to wait for recession to bring about a bigger deficit of its own accord. If a preventive stimulus turned out to be premature, the worst that could happen is slightly higher inflation than today’s 1.1%—which would in any case help thehit its inflation target of close to 2%. A little more inflation would also even out imbalances in competitiveness between Germany and the rest of the euro zone.
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