Germany slammed for domestic under spending by Nobel prize-winning economist

Sir Christopher Pissarides said that despite the bounce back in the single currency zone after years of crisis, the Continent’s largest economy was still exerting a damaging and unnecessary drag

'Why is there no demand? Because of German fiscal policies!' (Getty)

A Nobel economics laureate, Sir Christopher Pissarides, has hit out at Germany’s refusal to increase its domestic state spending in order to help entrench the eurozone’s recovery.

Speaking at the Lindau meetings in Germany on Wednesday, Sir Christopher said that despite the bounce back in the single currency zone in recent months after years of crisis, the Continent’s largest economy was still exerting a damaging and unnecessary drag.

“German fiscal policy is not at all what some countries still need,” he said, arguing that demand across the single currency zone was still too low.

“Why is there no demand? Because of German fiscal policies! There is austerity, there is low infrastructure spending and therefore companies are hesitating [on] investment.”

“Where is expansion going to come from? It’s going to come from the surplus countries spending more. Germany has a bigger surplus even than China, they should spend it in the European economy.”

The German government is running a fiscal budget surplus and its current account surplus (the difference between its total national spending and total national income) of $294bn in 2016 has drawn criticism from a host of economic bodies, including the International Monetary Fund, for similar reasons as those advanced by Sir Christopher.

Sir Christopher, who was awarded the Nobel in 2010 for his theoretical breakthroughs on labour market analysis, said that countries such as Spain had pushed through major and necessary job market reforms in 2010 and 2011 in the teeth of its sovereign debt crisis.

The official headline Spanish unemployment rate currently stands at 17.3 per cent, down from a 2013 peak of 27 per cent.

But Sir Christopher said it should be falling faster and that higher German state spending would help.

“It’s certainly the case that if the European economy as a whole expanded faster we would see faster positive results from these [labour market] reforms,” he said.

Another Nobel Laureate, Eric Maskin, suggested to the same Lindau meeting that the eurozone would benefit by delegating individual government fiscal targets to a technocratic council, in the same way that monetary policy has been delegated to the European Central Bank.

But Sir Christopher said that the evidence of the formal council of eurozone finance ministers known as Ecofin – in which all members are nominally equal – made it clear that Germany would not permit such a delegation of authority.

“Who had the loudest voice in Ecofin? We know who has the loudest voice over the last five years – it’s [German finance minister] Wolfgang Schauble. The others have to go along- unless you’re some kind maverick like [former Greek finance minister] Yanis Varoufakis and you keep saying 'no, no', until you’re fired,” he said.

Germany claims that its current account surplus reflects a prudent culture of saving from its ageing population rather than damaging under-consumption and under-investment.

Eurozone GDP grew by 0.6 per cent in the second quarter of 2017, double the rate of the UK, where the economy has been hampered by a spike in inflation and Brexit-related uncertainty.

The ECB President, Mario Draghi, addressed the Lindau meeting earlier on Wednesday, where he pushed back against claims - often emanating from Germany - that the central bank's money printing programme has harmed the eurozone economy.