A Green Germany Could Pump Up Europe’s Fiscal Push

Angela Merkel, the conservative chancellor who has led Germany since 2005, has already eased some of her past opposition to borrowing. She isn’t running for re-election this September and polls put the Greens in second place, close behind Ms. Merkel’s Christian Democratic Union-led alliance. They could emerge as either junior partner or even leader of the next governing coalition.

The Greens have evolved from an antinuclear pacifist party to a pragmatic left-of-center group that regularly participates in coalitions federally and in Germany’s states, called länder. The party still has its hard-line environmentalist wing, but leadership is in the hands of its moderate wing, which includes Annalena Baerbock, the 40-year-old parliamentarian nominated last week to run as chancellor this fall.

“Many people formerly thought the Greens would never do economic policy—they only want to do organic farming and vegan Yoga courses,” Sven Giegold, a Green member of the European Parliament and a party spokesman on economic issues, said in an interview. “But these times are over. We are in government already in 11 of 16 länder and in one of them, the prime minister. We are not naive. We know how governing works.”

As the Greens have moderated, the rest of the world has moved left, particularly on climate. Thus, the Green platform wouldn’t look out of place in many mainstream liberal parties. They want to slash carbon emissions faster by raising carbon prices and phasing out coal and the internal combustion engine, boost taxes on the rich and multinational corporations and promote industries of the future, such as renewable energy and artificial intelligence.

Unlike right-wing populist parties, they are staunchly globalist, supportive of global agreements on trade, human rights and the environment. They are tougher toward China and Russia than Ms. Merkel, citing similar reasons as the U.S.: geostrategic rivalry and human rights.

The Greens also differ from Ms. Merkel on something that would be utterly unremarkable in any other country: a willingness to run budget deficits.

Germany’s prevailing economic ideology, ordoliberalism, treats debt as almost immoral. A constitutional debt brake requires länder to balance their budgets and limits structural federal deficits to 0.35% of GDP. By comparison, eurozone members’ (frequently breached) deficit limit, enshrined in the Stability and Growth Pact, is 3%, and the U.S. federal deficit averaged 5% from 2009 to 2019.

Ms. Merkel’s government long boasted of its “black zero”: deficit-free budgets that actually paid down debt. Such fiscal discipline was historically prudent, but not in the last decade when the world was chronically short of demand.

The eurozone has a built-in bias toward austerity because of the Stability and Growth Pact and because a heavily indebted country like Italy can’t borrow as much when it no longer controls its own currency. In the last decade Germany amplified that bias by resisting joint efforts to bail out Greece, backstop the region’s banks or borrow via Eurobonds to support the region’s growth.

In the last year, though, Germany has changed. Ms. Merkel threw her support behind a 750 billion euro ($907 billion) European Union recovery fund, financed by Eurobonds, a big step toward a U.S.-style fiscal union. Her government also suspended the debt brake to pump pandemic aid into the economy.

These steps were meant to be temporary; the Greens would make them permanent. “Germany has a bigger problem than debt,” Mr. Giegold said. “The biggest problem is the lack of investment [that] is risking our competitiveness.”

The Greens would like to amend the debt brake to allow borrowing for public investment, which they argue is economically astute since German interest rates are negative. “The smart entrepreneur doesn’t save, they invest. The smart state does the same,” the party platform declares.

The party has proposed investing 50 billion euros a year on faster internet, research and development, charging stations, expanded railways, emission-free buses and urban development.

That is comparable to President Biden’s infrastructure plan when measured as a share of economic output. But the Greens don’t share the U.S. left’s more expansive embrace of deficits. They are “pragmatic, not dogmatic,” said Marcel Fratzscher, president of DIW Berlin, a German think tank. “I would not put them in any [economic] camp, even Keynesian.”

The Greens want to make the EU’s recovery fund permanent, expand the EU’s budget financed by its own taxes, and reform the Stability and Growth Pact so that “excessive pressure to save is prevented and investments in the future can be further increased,” according to its platform.

The obstacles are considerable. Even if the Greens come out on top in September they will lack the votes to amend the constitution. Indeed, the rise of the Greens doesn’t reflect a leftward shift in German politics, but rather disintegrating support for the Social Democrats, Ms. Merkel’s current junior governing partner.

Across Europe traditional centrist parties have leached voters, often to antiglobalist movements on the right. The EU has already lost Britain to an antiglobalist backlash.

For now, though, leaders in France and Italy are once again watching the U.S. race ahead and keen to mimic its fiscal formula. Germany seems ready to join them.

Write to Greg Ip at [email protected]