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There’s a growing hole in the hull of Germany’s government, and it’s shaped like a zero.
The schwarze Null, or black zero, has been government policy for a decade. The term refers to a balanced budget without any new government borrowing—a political stance that’s championed by Angela Merkel’s center-right Christian Democrats (CDU) and enforced in the German constitution itself since 2011.
But Merkel’s center-left coalition partners, the Social Democrats (SPD), have just lurched to the left with the election of new leaders who want to boost spending. A top economist now warns that the tussle over the black zero “could ultimately break” Merkel’s government.
Sensible beginnings
When the black zero was introduced in 2009, under the austere CDU finance minister Wolfgang Schäuble, it made sense. It was the aftermath of the financial crisis, and fiscal stimulus packages and bank bailouts had left Germany—which had just started recovering from the astronomical cost of reunification—with an 81% debt-to-GDP ratio.
From 2014, the government managed to balance its federal budget, even while raising spending—a lengthy growth cycle was underway and tax revenues were up, so there was no need to incur new debt. The black zero had proved its worth and became fetishized by the CDU, quite literally.
When Schäuble finally stepped down in 2017, his staff at the finance ministry formed a giant human zero to honor his achievement.
Auf Wiedersehen, Herr Minister! Ihre Kolleginnen und Kollegen im Bundesfinanzministerium. #Schäuble pic.twitter.com/5fODQT9RVG
— BMF (@BMF_Bund) October 24, 2017
And when the German economy flattened this year, flirting with recession and prompting widespread criticism of the black zero, the CDU put out a tweet describing the policy as a “little fetish”—the missive was illustrated with a black zero sporting a kinky leather cap.
Ja, wir gestehen, wir haben einen kleinen Fetisch: Solide Finanzen ohne neue Schulden! Das ist praktizierte Generationengerechtigkeit! Und es ist die beste Voraussetzung für Investitionen in die Zukunft. Uns geht es um beides. Und unser Haushalt zeigt: Es geht beides! pic.twitter.com/abIMN64eMO
— CDU Deutschlands (@CDU) November 27, 2019
Critics step up
In the context of Germany’s economic stagnation—services are doing fine but the manufacturing sector, representing almost half the economy, is in recession—many have begun questioning the wisdom of this fetish.
The left has long opposed it, and economists across the spectrum have for months been begging Berlin to stop constraining the economy, but in September they were joined by Germany’s business lobby, a previous supporter of the black zero.
Dieter Kempf, head of the Federation of German Industries (BDI), said the policy was justifiable when “there was a real need…to improve budgetary discipline,” but now “the economic boom is coming to an end, the state can borrow at negative interest rates and we have a big investment deficit.”
The biggest development, however, was the SPD’s election a couple weeks ago of left-wingers Saskia Esken and Norbert Walter-Borjans to the party’s leadership. Esken and Walter-Borjans are notable coalition skeptics, and one of their key campaigning points had been the abandonment of the black zero. They want the German government to invest more in things like infrastructure, the fight against climate change, and social welfare, and the black zero policy makes such investments difficult.
The SPD election prompted fears of the coalition’s imminent demise, not simply because of the balanced-budget issue, but also because supporters have been fleeing the SPD over its partnership with Merkel’s CDU, and the lack of results the coalition has been providing for the center left.
However, Esken and Walter-Borjans swiftly decided not to pull the SPD out of the coalition just yet—a move that would likely lead to early elections, ahead of the planned date in October 2021. Instead, they said they would try to renegotiate the coalition’s policies.
The other key player here is Olaf Scholz, the SPD finance minister who took over from Schäuble in 2017 and has remained a supporter of his predecessor’s signature policy. The relatively centrist Scholz ran for the SPD leadership in November and was indeed tipped to win it—Esken and Walter-Borjans’ victory was a surprise.
When SPD members on the weekend voted in favor of a resolution stating that future investment “should not be allowed to founder on dogmatic positions like Schäuble’s black zero,” Scholz was left with a big decision, and opted to get in line with his party. “I like this sentence,” he said Wednesday.
The zero’s weight
“This policy shift is much needed and crucial for the German economy,” said Marcel Fratzscher, the president of the German Institute for Economic Research (DIW Berlin) and one of the leading economists who has long been calling for an end to the black zero.
However, Fratzscher told Fortune, trouble is on the horizon. “The political opposition is significant and it is likely to intensify the infighting within the government and could ultimately break it,” he said. “Political uncertainty and policy paralysis are here to stay for some time longer in Germany.”
What would abandoning the black zero entail, though? For a start, it is important to distinguish the black-zero policy from the constitutionally enshrined debt brake that enforces it.
The Hertie School’s Mark Hallerberg and Jobst Fiedler recently argued that the black zero is a genuinely harmful “political convention” that strangles the investment needed for the climate emergency and infrastructural spending, but the debt brake mechanism—which offer flexibility in times of abnormal market conditions—is actually worth maintaining.
“[Under the debt brake] there can be a deficit in the public budget if there are less tax revenues in a recession,” said Oliver Holtemöller, vice-president of the Halle Institute for Economic Research (IWH)—a body that, like DIW Berlin, has for months been advising the German government to drop the black zero.
“Over a complete recession and boom cycle altogether, you can argue the public budget should be balanced,” said Holtemöller. “It makes sense not to make more debt on average, but this does not imply that the public budget should be balanced each year.”
Indeed, Holtemöller sees the black-zero debate as a political storm in a teacup, and far less important than long-term issues such as the auto industry’s uncertain outlook, and the likelihood that Germany’s workforce will soon start shrinking . He said the policy “does not really make sense” from a strict economic point of view, but in any case Germany is not about to slip into an overall recession—and if it did, the black zero would probably be quickly ditched.
For now, though, the issue remains political dynamite. The CDU reacted to the election of the SPD’s new leadership by saying the black zero was not up for debate. But with Scholz’s sudden conversion away from the coalition policy, the government’s future is in doubt.
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