News ID: 257173
Published: 1138 GMT August 12, 2019

Don’t rely on German fiscal medicine to fix economy’s ailments

Don’t rely on German fiscal medicine to fix economy’s ailments

Even with Germany mired in an industrial slump and possibly flirting with recession, don’t expect Chancellor Angela Merkel to loosen the purse strings just yet.

Europe’s largest economy probably suffered a contraction in the second quarter, inflicted by global trade tensions, Bloomberg reported.

The standoff between the US and China has hit Germany in a vulnerable spot because industry plays such a significant role in driving its growth, with manufacturers from Daimler AG to BASF SE lowering their outlooks.


Weak performance


While the European Central Bank is readying monetary aid to combat the slowdown that’s also affected the broader euro area, the institution would rather Germany help out with a dose of fiscal stimulus from its ample state coffers — not least since bond yields are so low that borrowers are effectively paid to take on debt. But Merkel and her colleagues are committed to a balanced budget and aren’t about to oblige.

“We’re going to get lower rates from the ECB at the September meeting but this will not be the big game changer — the big game changer is the German government,” Carsten Brzeski, the chief economist at ING-Diba AG, said on Bloomberg Television.

“They should act. They should insert fiscal stimulus into the economy to get growth to a higher level again.”

Brzeski anticipates flat-lining during the past quarter in gross domestic product figures due on Wednesday. A quorum of his colleagues surveyed by Bloomberg are less optimistic, predicting a 0.1 percent contraction.

That view of a shrinking economy is shared by the Bundesbank, which reckons growth for the whole year will amount to only 0.6 percent, the slowest since 2013.

While the domestic economy is holding up, with record-low unemployment buoying domestic demand, “you can say German industry is in a recession,” said Stefan Muetze, an economist at Helaba in Frankfurt.

With momentum below potential, an injection of government cash could aim to bolster growth by helping modernize the country’s creaking infrastructure — from frequently delayed trains to patchy wireless connectivity. Such suggestions are regularly offered by international observers such as the Organization for Economic Cooperation and Development.

Germany could also do with developing new areas for the economy. As carmakers abandon combustion engines for electric motors, the country is a relative laggard compared with the US as a location for the fast-growing technology sector.

Since the debt-to-GDP ratio is set to fall below 60 percen this year, in principle there’s room to boost government expenditure in line with ECB Chief Mario Draghi’s calls to deploy budget policies to aid expansion, where possible.

The Group of Seven industrialized nations, of which Germany is a member, also gave a cautious nudge to seek ‘growth friendly’ fiscal policies at a meeting of finance officials in July.

But in Germany there are legal, political and cultural barriers to ramping up spending. They manifest themselves in a constitutionally enshrined debt-brake, which limits net new federal debt to 0.35 percent of nominal economic output in periods of growth.

Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research and a well-known critic of the government’s fiscal rectitude, said the country’s guardians must work to overcome such qualms, however well entrenched they are among voters.

“The German government has really not understood that now is the right time to basically have a fiscal impulse in order to have a soft landing,” he told Bloomberg Television.

“Germany’s economy is highly dependent on exports and that’s what’s hitting the German economy now.”

Debate has begun in Berlin on when fiscal stimulus might be warranted but there’s no consensus for action yet. Officials prefer to keep their powder dry until it’s clear how deep the downturn will be. The main proponents of spending so far are Merkel’s Social Democrat coalition partners, who want outlays to combat climate change.

Were Germany to sink into recession, that could legally remove the shackles of the debt break and allow for more stimulus.

Meanwhile, the ECB is poised to unveil monetary stimulus in September, possibly including a cut in interest rates deeper into negative territory and new quantitative easing. Those super-low borrowing costs and asset purchases are particularly unpopular in Germany, where they’re seen as an affront to savers — a sentiment often tapped by vote-hungry politicians.

“The political criticism on the ECB does not lead to more fiscal stimulus,” said Brzeski.

“If you say no to more monetary easing from the ECB, you would have to say yes to more fiscal stimulus coming from the government.”






Resource: Bloomberg
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