There are two dimensions on which Germany´s new 50 billion euro fiscal package should be judged. The first is economic: is the package the right thing to do to rescue German growth and jobs, and will it fulfil Germany´s responsibilities as the biggest economy in the European Union? The second is political: will the package help German voters make a safe and sensible choice in the general elections that will take place in September? My answer on the first is that the package is too small to have enough economic impact. My answer on the second is that it increases the chance of a bad electoral outcome.
At least Angela Merkel, Germany´s Chancellor, changed her mind. Until recently, she had insisted that fiscal stimulus was the wrong thing to do to deal with the global economic crisis. Governments, she said, should keep their budgets balanced. But when demand of all kinds is dropping sharply—demand by consumers, by companies, for exports— and when monetary policy is having no effect on bank lending, public spending and tax cuts are really the only option. They may be a bad option, for money can be wasted and public debts will increase. But doing nothing is even worse.
So it is good that she is at last doing something. This fiscal package, together with some previous small measures, will amount to about 1.2% of German GDP. The package is sensible to focus its tax cuts on the poorest people, for such people are likeliest to spend their extra money rather than saving it. But with economists forecasting a drop in German GDP this year of something like 2-3%, such measures are not truly proportionate to the problem that Germany faces. President Barack Obama´s fiscal package is likely to cost at least 4-5% of GDP a year, depending on what Congress agrees to.
Nor is this package going to be enough to quieten the criticism of Germany coming from its eurozone partners, especially France. Germany has been running a huge surplus on its balance of payments, which was 6.6% of GDP last year. So it has been living off excessive consumption by others, while not consuming enough itself. If Europe is to recover from this year´s recession, it needs the surplus countries—which include the Netherlands and Austria as well as Germany—to spend more money, and import more goods and services. This German boost moves in the right direction, but, again, will be too small to help the weaker euro members, such as Spain and Italy.
By the way, this does not mean that Italy too should not do more. Giulio Tremonti and his colleagues are worried that the government cannot borrow more when its debts are already so high, at about 104% of GDP, and when markets demand higher interest rates on Italian government bonds than on German ones. Yet the gap is not large, and with deflation forcing down prices, the risk of a big rise in government borrowing costs looks small. At least, the risk is one that is worth taking. The risk of a severe recession leading to a collapse in tax revenues is even worse. So Italy too needs another, bigger fiscal package as well as lobbying Germany to do more.
The domestic German politics of this package are harder to judge. Mrs Merkel´s Christian Democrats are well ahead in the opinion polls. But that was also true at this time of year in 2005 when the last election was held, and Mrs Merkel won only narrowly and had to form a “grand coalition” with the Social Democrats. She is a very dull campaigner. Yet also the party that has recently been getting stronger in Germany is Die Linke, the leftwing group that split away from the Social Democrats and is led by Oskar Lafontaine, a highly populist former finance minister. By doing too little to rescue the economy, Mrs Merkel is taking the risk that by September, with unemployment much higher and the recession looking painful, Mr Lafontaine will be even more successful—leading even to the possibility of a coalition government with the Social Democrats.
Such a sharp leftwing move would be bad for Germany. It would also be bad for Europe. A new, bigger, fiscal package please, Mrs Merkel, before the election campaign begins during the summer.