MNI INTERVIEW: Germany Nears "Roaring 20s" As Debt Taboo Fades

Germany could be on the verge of a "Roaring Twenties" boom as major political parties abandon their decades-old attachment to balanced budgets and consumers unleash demand suppressed during the pandemic, a government adviser and leading economist told MNI.

While rising Covid-19 infection rates and slow vaccination progress probably mean a return to tighter restrictions in May or June, and corporate debt overhangs and higher unemployment will present medium-term challenges, Europe's largest economy should begin its recovery after the summer, Jens Suedekum said in an interview last week.

Export growth, a robust manufacturing sector and a boom in spending by consumers using surplus cash accumulated during lockdown should be supported by continuing expansionary fiscal policy, Suedekum said, with even the governing conservatives of the Christian Democratic Union abandoning their traditional insistence on the "Schwarze Null" (black zero), or balanced budget.

"If you talk to the finance ministry and the CDU ministries these days - and they're now in the process of coming up with the budget for 2022 - they're coming up with by far the highest demands," explained Suedekum, a member of the Federal Ministry for the Economy and Energy's Advisory Board and professor of international economics at Heinrich-Heine-University, Dusseldorf.

NO MORE BLACK ZERO

"A return to Schwarze Null might happen rhetorically, but in practice they will work out ways to circumvent it, such as those hidden parts of the budget, special purpose vehicles and these type of things that still have flexibility."

September's federal elections will not alter this new-found government expansiveness, said Suedekum, who calculates the chances of a so-called "black-green" coalition between the CDU and the Greens at about 80%.

"Both of them want to implement their projects, and some in the CDU want to cut taxes for business. All of that is incompatible with black zero ways of thinking."

But even as the economy enters what could be a decade of strong growth, the pandemic will leave lasting effects, with some sectors suffering long-term damage, Suedekum said.

Smaller, less efficient businesses will disappear, together with some specialised in combustion engine technology left redundant by the spread of electric vehicles, with "many years of economic suffering and loss of accumulated earnings" ahead for those unable to re-enter the labour force.

"The inner parts of smaller cities will probably be pretty deserted," he continued. "Business travel will probably be cut permanently, because now we do everything on Zoom, which will affect the hotel and commercial real estate sectors."

EUROZONE ACTION

Key to the post-Covid recovery of the eurozone as a whole will be for the European Central Bank to maintain monetary support via its pandemic emergency purchase programme, and for it to make permanent some of the PEPP's features, which are more flexible than those of the ECB's older quantitative easing facilities, Suedekum said. The eurozone also needs to turn its Covid recovery fund into a permanent tool, funded by joint eurozone bond issuance, he added, saying "that's what the ECB has been asking for behind closed doors."

"We need a better combined EU fiscal and monetary policy. Whether the institutions are ready to move into that direction is another issue," Suedekum said, noting that the jury was still out on whether ECB President Christine Lagarde will get the fiscal stimulus needed to allow monetary policymakers greater flexibility.

In the meantime, the ECB could face other challenges, with German inflation set to squeeze higher due to the end of a temporary reduction in VAT and rising energy prices. While it should ease back into negative territory this time, Suedekum said a future disparity in inflation rates between the eurozone as a whole and individual national economies could put the central bank to the test, and possibly even expose it to legal action, should it try to raise rates in such a situation.