Even with money for nothing, Merkel still reluctant to spend

German Chancellor Angela Merkel. Photo / Getty Images

In Germany there's no such thing as guilt-free borrowing.

Even when it's the lenders who pay the borrower.

"In German, debt is the same word as guilt," former Italian Prime Minister Mario Monti said in an interview. The word is "Schuld."

Monti is among the critics who say Chancellor Angela Merkel's unwillingness to pull out the credit card is holding back the euro-area economy and making it harder to overcome the financial-crisis aftermath. By sitting on the fiscal sidelines even with a budget surplus, Berlin has put virtually the entire response to the threat of deflation on the European Central Bank.

The latest reason to raise eyebrows at the intransigence is that Germany now pays just 0.2 per cent to borrow for a decade. It would charge its lenders - through negative interest rates - to get cash for as long as five years.

"It's almost pathological," said Simon Tilford, deputy director of the Centre for European Reform in London. "You're talking about an economy where the fiscal situation is robust, inflation is exceptionally low, the capital stock has been eroded for many years and where the government can borrow at close to zero and still it refuses to spend."

That aversion, stemming, the thinking goes, from the hyperinflation of the 1920s and a desire to run up its current-account surplus, have irritated allies in Washington and Paris who want to do more to speed expansion.

It's not much help to the German economy.

Public investment has fallen as a share of German government expenditure to just above 10 per cent from 14 per cent at the start of the 1990s. Studies by the World Economic Forum find executives report a steady decline in the quality of infrastructure in the past decade.

The economic payoff could more than cover the cost of borrowing. A December study by Selim Elekdag and Dirk Muir, economists at the International Monetary Fund, calculated that state spending of 0.5 per cent of gross domestic product for four years would boost GDP by 0.75 per cent.

The spillover effect would also raise output in Greece, Ireland, Italy, Portugal and Spain by 0.33 per cent, the study estimates. Faster growth would surely be welcome news for the ECB, whose crisis-fighting aggressivneness has earned German ire from the start. A pair of Germany's ECB policy makers, Axel Weber and Juergen Stark, quit in protest in 2011.

So why won't Merkel loosen the purse strings? As she aims to keep a balanced budget through the 2017 election, the argument is that the economy is doing well without stimulus, a debt equivalent to 72 per cent of GDP requires paring to meet euro-area rules and an aging population requires savings now.

Yet Michelle Tejada, an economist at Roubini Global Economics LLC in London, says by not spending now, Germany may find its economy overheats at relatively low rates of expansion and that it's even harder to finance pensions.

The country may even end up surrendering its role as Europe's engine if its trend rate remains about 1.7 per cent.

"You can't sustain a whole region when growth is so low," she said.

- Bloomberg