The eurozone has a problem. Its biggest economy, Germany, is in or close to recession.
That has further stimulated a debate about whether Berlin should open the financial taps and spend more.
Should Germany launch a programme of spending on, for example, its infrastructure?
Should the government ditch the policy of balancing the budget, known as “the black zero” and the related legal restriction on borrowing called the “debt brake”?
We will get some indication of the impact of Germany’s downturn with new eurozone economic growth figures on Thursday, though we will have to wait two weeks for a read-out on the country’s own performance in the third quarter of the year.
The eurozone as a whole might not be in recession, but inevitably the downturn in Germany affects the country’s neighbours.
The question is what should policymakers – especially the German government and the European Central Bank (ECB) – do about the situation.
The ECB has already taken steps. It has cut its interest rates to ultra-low levels (to below zero for one of its key rates) and it is about to re-start the policy known as quantitative easing, buying financial assets with newly-created money
But there are real doubts about how effective these measures will be. Many economists believe that monetary policy – what central banks do – has done about as much as it can in the eurozone.
Many argue that governments should do more. The current president of the ECB Mario Draghi and his successor Christine Lagarde, who takes over this week, have both taken that view.
In September, Ms Lagarde told the European Parliament: “Some countries in the euro area can use some of their fiscal space [government spending and taxation] in order to improve broadband infrastructure and set in place the public spending that will help fight the recession.”
She didn’t name the countries that could afford to take such action, but she did say it was now true of a majority of them. The most obvious example is Germany which has had a surplus in its public finances – with tax revenue higher than spending – since 2012.
The IMF’s chief economist, Gita Gopinath, was explicit on this point in the foreword to the IMF’s recent World Economic Outlook.
“A country like Germany should take advantage of negative borrowing rates to invest in social and infrastructure capital,” she wrote.
Her reference to negative borrowing rates refers to the fact that Germany, and a number of other countries, can borrow at an interest rate of less than zero. In effect, the financial markets pay them to borrow.
Prof Peter Bofinger of Würzburg University, and a former member of Germany’s economics experts council, agrees with Ms Gopinath that the country should take advantage of the these below-zero borrowing costs to invest in infrastructure and social housing.
Currently he says net infrastructure investment – that is, after the wear and tear on existing infrastructure is factored in – is below zero.
The idea that Germany has a problem in this area might come as a bit of a surprise. But Prof Bofinger says he often sees the evidence himself. He describes travelling by train in the country as “a real adventure – whether the train will arrive, how many minutes and hours they are delayed, whether you get something to eat on the train”.
“Transportation is in extremely bad shape and it is a consequence of insufficient investment for many years.”
He says it is a “tremendous mistake” not to use the opportunity presented by those favourable borrowing costs to address some of these problems.
Tax cuts for business?
He believes the debt brake and black zero policies don’t make sense. If every major government followed the black zero policy, “the world economy would end up in a black hole,” he says.
Currently among the G20 group of leading economies only two others – Russia and South Korea – have government budgets with a surplus.
But Prof Bofinger does not favour using the infrastructure programme in the short term as a stimulus for a flagging economy. The construction industry is already working at full capacity.
What he favours is more generous tax treatment to encourage business investment, which he says is currently where German economic performance is weak.
But there are many defenders of Germany’s cautious approach to managing its government finances.
Prof Clemens Fuest is the director of one of the country’s leading economic research agencies, the IFO institute in Munich. He argues that Germany is not facing a serious downturn – though there might be a technical recession in the sense of two consecutive quarters of declining economic activity.
Germany has full employment and does not currently need further stimulus, he argues. There would, however, be a case for allowing the government to increase its borrowing if there were a sharper decline in economic activity.
He agrees that the country could benefit from infrastructure improvements but it is nonetheless in better shape than in many other European countries. The problem is not so much lack of money for projects, he says, but delays in implementing them often due to the objections raised by German residents.
He argues the debt brake was an appropriate response in 2009, around the time of the global financial crisis, when the government’s debt was higher in relation to GDP and it remains a useful restraint.