Prolonged Stagnation: The Impact of Fiscal and Monetary Austerity

Fiscal and monetary austerity will extend economic stagnation

With the economy on the edge of recession, the government’s decision to return to (almost) balanced fiscal budgets next year is a bold move. No doubt, after years of zero and sometimes even negative interest rates, Germany’s interest rate bill is increasing and there are good reasons to stick to fiscal sustainability in a country that will increasingly be affected by demographic change (and its fiscal impact). Nevertheless, the last 20 years have not really been a strong argument for pro-cyclical fiscal policies. With both fiscal and monetary policy becoming much more restrictive, the risk is high that the German stagnation will become unnecessarily long.

 

Waiting for 'Agenda 2030'

In the early 2000s, the trigger for Germany to move into the final stage of change management, 'acceptance' (and solutions), was record-high unemployment. The structural reforms implemented back then were, therefore, mainly aimed at the labour market. At the current juncture, it is hard to see this single trigger point. In fact, a protracted period of de facto stagnation without a severe recession may reduce the sense of urgency among decision-makers and suggests Germany could be stuck in the stages of denial, anger, bargaining and possibly depression for a long time. Two decades ago, it took almost four years for Germany to go through the five stages of change. We hope this time that history will not be repeated.

 

The German economy in a nutshell (% YoY)

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