Why ‘Black Zero’ might not be so bad

In 2015, the German budget should be balanced without new debt. German finance minister Wolfgang Schäuble has set this clear objective. This would go even further than the German ‘debt brake’ which leaves 0.35% of GDP as a debt margin as well as room for deficit spending during cyclical downturns. Schäuble will be the first German finance minister to reach this goal, the ‘Black Zero’, since 1969. To pursue financial sustainability, he should go even further and reduce the debt.

Just like the Black Zero in Superman, Schäuble’s Black Zero is seen as a supervillain by several of Germany’s neighbouring countries as well as domestic leftist politicians. As there are strong signs of the economy slowing down in Germany, various politicians have asked for fiscal measures to stimulate it. The French government supports this idea, hoping for assistance with their own stuttering economic engine.

Of course, economically there is no reason to reach exactly zero financial deficit. Black Zero is not a theoretical concept but a number, a symbolic figure. Nevertheless, this figure represents the reliability of fiscal policy in Germany. It goes one step further than the debt brake rules which even allow for ‘cyclical breathing’. This means that while a cyclical deficit is within the rules during an economic downturn, the debt needs to be paid back as soon as the economy recovers.

Bearing in mind that the German budget would have allowed for a 15 billion euros surplus in 2014 according to last summer’s financial planning, the ‘Black Zero’ goal does not sound that ambitious any more. However, this was before the new government decided to spend big. Looking ahead to the next decade during which massive demographic costs are already anticipated, now seems to be the time to provide for financially more difficult times mid-term. In fact, Mr Schäuble did not have much trouble balancing the federal accounts due to high income tax revenue and low interest payments in the last couple of years. In 2010, when the debt brake rules came into effect, the finance minister had approved an austerity package, but only a few of the included measures have actually been implemented.

At present, German politicians in various ministries are arguing for increased government spending. Looking at the facilities of the German armed forces, the minister of defence might even have a case. In this regard, the finance minister’s ambition for a balanced budget acts as the much-needed barrier against short-sighted politics. Nevertheless, the German finance minister just recently announced 10 billion extra euros for public investment over the next four years while maintaining a balanced budget. Hence, he will need to cut other expenditure to accommodate this.

This kind of priority adjustment is compatible with financial sustainability because expenditure shifts from one task to another instead of just increasing expenses. In the long run, Germany will profit from not spending too much in relatively relaxed financial surroundings, so hopefully Mr Schäuble will stay strong in his pursuit of ‘Black Zero’!