The author is chief European economist at PGIM Fixed IncomeWhen someone always gives the same answer, no matter what the question, there is reason to be suspicious. Take German fiscal policy, for example. The answer after the global financial crisis? Austerity. The European sovereign debt crisis? Austerity. Russia’s invasion of Ukraine? Once again, the German finance minister’s answer seems to be: austerity.
But unlike other countries in the EU, Germany’s problem was not one of over-investment or capital overhang. That’s why austerity simply magnified the country’s under-investment and made its economy less resilient to the latest energy shock. Giving the same answer repeatedly does not just betray a lack of creativity — for Germany today, more austerity is also the wrong path.
Successive episodes of turbulence since the 2008-2009 global financial crisis had already blown German gross domestic product growth off course. To this day, the economy still hasn’t regained its pre-crisis trend. Even before Russia’s invasion of Ukraine in February, the pandemic exposed the vulnerabilities arising from Germany’s under-investment. Together with an ageing population, this shortfall contributed to weak growth.