Spend, sometime: Germany’s economic shift

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Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. First, Burundi held a rigged election. Then this week, the incumbent president Pierre Nukurinziza passed away unexpectedly. His chosen successor will be the impoverished East African country's first new leader in 15 years. But will anything change? And today, the economist unveils its 2020 election model, a constantly updated predictor of who will win America's presidential race. It's a monumental bit of number crunching. We look into how it works and why it's worth all that trouble. First up, though, When it comes to the national purse, Germany has a hard earned reputation for frugality. But that seems to be changing. Last month, Chancellor Angela Merkel shocked many by joining with her French counterpart, Emmanuel Macron in a 500 billion euro rescue fund for European countries hit hard by COVID 19. It might seem like a sudden loose of those purse strings, but a change in economic thinking has actually been in the works for some time. Tomorrow, a cabinet meeting is expected to approve a domestic recovery package to the tune of 130 billion euros.

There's a whole potpourri of measures in this package, a total of 57 in fact.

Tom Nuttall is the Economist's Berlin bureau.

Chief the real sort of headline grabbers are a cut in the rate of VAT sales tax to 16% which took everybody by surprise. A boost to child benefit, subsidies for purchases of electric vehicles, some help for over indebted municipalities, and then a whole range of other things that, that, that take the package up to this headline figure. But all in all, it's big. It's bigger than most people expected it to be. And perhaps most interestingly of all, it's much bigger. Much bigger than what Germany was able to mar after the financial crisis in 2009. I think that that's a signal that something substantial has changed in the German economic debate.

And surprising not least because Germany is not known for being loose with the cash.

Quite the opposite. I mean, for years Germany has had a balanced budget policy, the so called Schwarzenull black zero. It has a so called debt break written into its constitution, which essentially makes borrowing under most circum other than very nugatory sums unconstitutional. It's been very reluctant to invest in infrastructure at home. And of course at European level, particularly during the eurozone crisis between 2010 and 2012, it very aggressively pushed a form of austerity that it had been practicing at home onto its eurozone partners, including in the bailouts for troubled southern European countries. We're dealing with an extraordinary shock here with the virus. But the magnitude and the form of the response, both domestically and at European really has taken some people by surprise.

And is it just simply the scope of the crisis that's changed the debate so much?

No, I think it's a bit more than that actually. It's a number of things that of course is the catalyst for what has happened here. It would be absolute madness to stick to balanced budget rules when your economy has fallen off a cliff in the way that Germany's and well, in the way that every European economy has. But there have been some sort of bigger sort of subterranean changes going on in Germany for several years now that I've been discussing with economists here. The economy, the economics profession itself has changed quite substantially. You now have a new generation of economists who are running research institutes or working in ministries, or running think tanks or whatever it might be, who are much more plugged in to international debates and much more part of the international mainstream of economics than a lot of the old, older generation were. Some of the older generation, who were perhaps more in the ascendant at the time of the financial crisis, were schooled in a form of economic thought known as auto liberalism, which is a very German approach to economics. The idea is that the state sets framework rules for very tough rules for the economy and then lets the market go. That's very much out of fashion now. And you see that in the public debate that takes takes place in Germany around economic matters, both domestically and European.

So is that it just a shift in economic thinking?

I think the second big thing that's shifted is that the Finance ministry, which since March 2018 has been run by Olaf Scholz from the Social Democrats, has become almost like a kind of intellectual salon where Mr. Schultz and some of the people who work around him, including his chief economist, have very much sort of cultivated this atmosphere of a regular exchange of views with some of the preeminent economists in Germany. They have a weekly conference call that takes place every Thursday. They all dial in on zoom and debate, whatever the hot issue of the day is. Some of those ideas, I'm told, have made their way into some of the recent policy measures that the government has pursued. And I think that certainly under Mr. Schultz's predecessor, Wolfgang Scheibler, who was a member of the conservative Christian Democrats, we didn't have that sort of atmosphere. Mr. Scheibler was famous for his disdain for economists, and the ones that he listened to were perhaps not the ones who were pursuing some of the ideas that some of today's new generation are pushing.

And so in a lot of the discussions we've had over the past few months, it's about the degree to which the coronavirus crisis has accelerated trends underway. And that sounds like what's going on here is that to say you think this kind of thinking, this kind of largess, then will outlast the pandemic.

Well, that's an interesting and open question, and I think you have to sort of break it down a little bit when it comes to the approach to fiscal policy at home. I'm not sure Olaf Scholz, when he's making the case for what he calls this big bazooka, very much grounds it in arguments about sticking to good budgetary rules. Essentially, Germany is able to afford what it's doing now because it has been so fiscally responsible in the past. It's saved in the good days, so it can spend in the bad. That's an argument that, of course, you also hear from the conservatives in the cdu. And the implication of that, of course, would be that. That when we get back to something approximating normality, then we will have a return to something like the status quo ante of pursuing balanced budget rules.

What does all this tell you about the broader situation in Europe, where Germany will be asked about sort of pan European solutions to the broader crisis.

So a few weeks ago, Germany and France struck a deal that would see the EU issue 500 billion in common debt to help fund recovery programs in countries that are hard hit by the pandemic. And what's interesting is that Mr. Schultz is P.O. portraying this as the first step in a big movement towards fiscal centralization in Europe. He talks of handing tax raising powers to the eu. You don't hear that sort of language from the conservatives in Germany at all. And the second reason for that is that this plan that is now going to be debated by European leaders at a summit on June 19, this is something for the long term, the monies that are going to be dispersed through the issuing of this debt will not start reaching recipient countries probably until 2022, 2023. They won, start to be repaid until much, much later than that. And most importantly perhaps is the fact that now a precedent has been set that when the EU is hit by an external shock, that's no one's fault, like the coronavirus, then it does. It's demonstrated that it has the political will to marshal a common fiscal response like this. And the way that the EU works is that if you've done something once in the past, then you could always reach for it again. And so that's why I think that we may be moving towards something a little bit more interesting in the European debate than we are in the domestic debate.

Tom, thank you very much for joining us. Great pleasure. Thank you.

In the little country of Burundi in East Africa, the president Pierre Nukuranziza died suddenly this week at the age of 55. The government said he suffered a heart attack, although some local sources whisper he may have died from COVID 19. Mr. Ncwanziza had been in power for 15 years and was about to hand over to a successor. He had been fond of exuberant political rallies, including drum circles and human pyramids. When he came to power after leading a faction in an ethnic civil war, he promised unity. But there were also many rallies against Mr. Nakwinziza and his legacy. Legacy is not exactly one of peace or prosperity.

So Piano Kronziza ruled Burundi for 15 years. And the last five years of his time in power were marked by violence, repression and spiraling poverty.

Olivia Ackland reports on Africa for the Economist.

And his most recent legacy is an election that happened on the 20th of May, which was widely believed to be rigged. And his chosen successor won with a landslide victory. He also downplayed the coronavirus. And in the weeks leading up to the election, his party held massive political rallies, as did the opposition party. And his government said that the country would get off lightly because it had signed a special pact with God. There are officially just 83 cases, but people reckon that there are far more people who have actually contracted the disease.

What about the wider story of his rule, the full 15 year span of it? How did his rule change Burundi?

So when Nukurziza first came to power in 2005, people were very hopeful that he would reunite the country after this bloody civil war which pitted two different ethnic groups against one another. And he did unite the country up to a point, but it remained very poor and volatile. And in 2015, he stood for an unconstitutional third term, which sparked a massive crisis. So army generals staged a coup which lasted less than two days. Riots erupted across the country. And in the three years that followed, his government brutally stifled dissent. Human Rights Watch watchdog reported that between 2015, 2018, over 1,700 people were targeted and killed. That included members of the opposition party who'd been seen protesting, who'd been seen marching. Activists, journalists were targeted and murdered. Bodies were found hacked up in forests and weighed down with stones at the bottom of Lake Tanganyika. And as a result of this oppression, over 400,000 people fled the country and are living as refugees in neighbouring countries. The people I've spoken to often mention the youth wing of the ruling party, who are known as the Abonyokuri. Mbonyokuri means those who see far in the local Kurundi language. And they say that they go from house to house, extorting money from people, beating people up and targeting members of the opposition.

Burundi was already a fairly poor country. I mean, how did Mr. Nagunziza's rule, this wanton violence, affect that situation?

So, as a result of these horrific abuses, a lot of the aid agencies and the foreign donors who were supporting Burundi's government pulled out. So this included the eu, who were funding about half of Burundi's government's budget. Yeah. So after these foreign donors pulled out, Burundi sunk into even deeper poverty.

And in the meantime, there has been this rigged, this contested election. I mean, what happens now?

So, yeah, as you say, he passed away just after the election in which the ruling party successor, his ally Everiste, and De Chaime won with a landslide victory. The election was widely deemed to be a sham. There were a lot of accusations of fraudulent activity, such as ballot stuffing. Apparently, ballot boxes were already full of papers when polling Stations opened in the morning. There were allegations that lots of votes had been added on behalf of dead people. So members of the ruling party had used voting cards belonging to people who were dead or people who were outside of the country. Refugees. There were no foreign observers present because 12 days before the election, a delegation from the East African Community were told that they would have to go into quarantine for two weeks. So there were no foreign election observers present. There were also a lot of accusations of violence, both in the run up to the election and on election day itself. The ferocious Mbonyakuri, who I mentioned earlier, allegedly lingered in polling stations and strong arms people into voting for the ruling party candidates. Over 400 people, according to the opposition. Over 400 opposition party supporters were rounded up on polling day and tossed into prison. The result was challenged by the main opposition leader, Agathon Roaza, who called the whole process a massive fraud.

It is still intolerable that states continue.

To conduct barbarities with respect to elections.

And pretend that we are advancing on the democratic path.

Democratic.

But his challenge was thrown out by the Constitutional Court a few days later, so he has little further recourse.

And so that chosen successor for Mr. Nkunziza will now take power. I mean, how will this work? Do you think he will continue along the same lines as Mr. Nukwanziza's rule?

So Nukunziza was supposed to be retiring, but he'd actually passed a law in which his successor would be legally obliged to consult him on issues of national security and national unity. Nukurunziza had given himself the title of Supreme Guide to Patriotism. Now that he's dead, his successor, Ndashime might have more space to do what he wants without Nukrunziza hanging in the shadows. Ndashime himself is a former Burundian general who, like Nukranziza, was a key figure during the civil war. He was formerly Interior Minister and Security Minister. I think he's going to try and open up Burundi and potentially bring back some of the international partners who packed up and left in the wake of all of the violence after 2015, which would be obviously a great thing for the country to get support from international partners, international donors who are helping the government. And so people are hoping and speculating that Ndashime will at last bring Burundi out of its isolation and encourage some international partners to come back.

Olivia, thank you very much for joining us.

Thanks very much, Jason.

For a lot more analysis like this, subscribe to the Economist. To find the best introductory offer wherever you are, just go to economist.com intelligenceoffer. Earlier this year, President Donald Trump appeared to be in the driver's seat for re election.

We're winning bigger than we've ever won before.

Then came COVID 19, economic cratering, protests across the country, and Joe Biden clinching the Democratic nomination as his opponent.

It's more than a comeback, in my view, our campaign.

It's a comeback for the soul of this nation.

If a week is a long time in politics, then November might as well be a lifetime away. Polls are, for now, suggesting Mr. Biden has a comfortable lead, and many election.

Models would say the same.

But the models don't always get it right.

Models aren't perfect, and they've made all sorts of notorious mistakes in recent years, from missing the financial crisis of 2008 and 9 to missing the presidential election of Donald Trump in 2016. But like democracy, they're the worst form of prediction, except for all the others.

Dan Rosenheck is the Economist's Data editor.

Here at the Economist, we are cautiously wading into these waters with the launch of our own statistical model to predict the 2020 US presidential election.

So as things stand right now, what does the model suggest is going to happen?

Joe Biden is leading by close to double digits in most national polls, with corresponding leads in all important swing states. If the election were happening today, he would clearly win by a landslide. However, the election is not being held today, and there's a long time to go in which lots of things can happen as a result. Given that uncertainty, our model currently calculates that he has roughly an 80% chance of victory.

So what exactly has gone into this model?

So, broadly speaking, this model synthesizes two families of information. The first is polls, both at the national and state level. The second is what we call fundamentals, which are structural factors that we believe influence or determine how people eventually come to reach the voting decisions that they do. So these would be things like the president's approval rating, the state of the economy, and whether or not he's an incumbent.

But what makes your model different from those of other forecasters who must surely be working from many of the same numbers?

There are a couple of things we've done differently that I hope will give us an edge in this election. One is that we've actually used a bit of machine learning. A lot of modeling traditionally has simply involved looking at which patterns in data best fit what happened in the past without devoting much effort to seeing how well they do at predicting data that they haven't done yet been exposed to. So we have used some techniques that basically try to separate out the useful signal from the random noise in historical data and generate equations that are optimized to predict what's going to happen rather than to retroject what has already happened. The second is that we're probably a bit more cautious about how reliable polls are early on in the cycle and then how big their errors are, even fairly close to election day. We also take special care to avoid the risk of what's called partisan non response bias, which is the phenomenon that occurs when there is unusually good or bad news for one side or the other, and that causes supporters of that candidate or party to be unusually likely or not likely to pick up the phone when a pollster calls.

It sounds as if by definition your forecasts are dependent on past data and past performance and past behaviors and so on. And yet we find ourselves in. In what's been repeatedly called an unprecedented situation. I mean, how does the state of the world now figure in for you?

It is an unprecedented situation. We have had so many cataclysmic and unprecedented news events with political ramifications happen in the course of this year. Obviously the coronavirus pandemic, the associated economic collapse, and now the protests over Black Lives Matter. And then in addition to that, we had an extremely unusual Democratic primary in which Joe Biden had been left for dead in February and then basically locked up the nomination within a few weeks. In spite of all of that, the polls have been unusually steady and much steadier than they were in 2016. Things certainly could change. And our model thinks particularly that if the economy rebounds strongly, that Donald Trump is likely to narrow some or even all of his polling deficit against Joe Biden.

But all that uncertainty puts you into a sticky position.

And after all that work, I mean.

Why go to all this trouble?

I think there are two broad justifications for putting in all of this effort. The first is that it's just really important to get a presidential election right. The single biggest determinant by far of what will actually happen on any major public policy issue is which of the two major parties controls the arm of government that is in charge of it. Then the second argument is that the only thing worse than a model is no model at all. And if we wind up being wrong, we'll take our and we'll learn from it and we'll do better next time. I think there's a real value to that accountability. That's how science works.

Dan, thank you very much for your time.

Thank you for having me.

To hear more about the Economist's election model, listen to this week's episode of our sister podcast, Checks and Balance. It's out tomorrow. Find it wherever you get your podcasts. That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and see you back here tomorrow.