News ID: 257467
Published: 1127 GMT August 18, 2019

Here’s how Germany could boost its economy, if it wants to act

Here’s how Germany could boost its economy, if it wants to act

Germany’s economy is in trouble and the government is dithering over whether to provide support in the form of fiscal stimulus.

The administration is under increasing pressure now that it’s clear the economy shrank in the second quarter and the recession risk is growing, Bloomberg reported.

But politicians are opting to wait, given that the downside forces are largely external and it’s not clear how deep the slump will be.

“If the manufacturing sector is in free-fall because your main trading partners are duking it out in a trade war, then obviously there is nothing you can do,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

“You can help to make sure that your domestic economy stays strong, but it’s not a clear story.”

The government has run a budget surplus for the past five years and cut its debt burden to the lowest since before the financial crisis, giving it room to spend. The administration is ready to run a deficit should the economy collapse, Der Spiegel reported on Friday.

If Chancellor Angela Merkel is willing to break some taboos though, she could really loosen the purse strings, with consequences beyond the nation’s borders.


Controversy without reward


Unless the economic situation becomes dire, the government has to play by its fiscal rules. Even if it scraps a commitment to keep the budget balanced, a constitutional debt brake limits the fiscal bang to €10 billion ($11 billion) at most, said Oliver Rakau at Oxford Economics.

Suspending the law would allow the government to run a deficit of about 1.5 percent of gross domestic product before it violates European Union rules limiting public debt to 60 percent of GDP, according to ING economist Carsten Brzeski.


In the pipeline


For the time being, Berlin’s plans are staying put. The draft budget approved earlier this week doesn’t foresee any new debt through at least 2021.

At the same time, the government has already set aside more than €150 billion for infrastructure, education, housing and digital technology over the next four years. That provides Europe’s largest economy with a boost of 0.4 percent of GDP and should be enough for now, reckons Berenberg economist Florian Hense.

“Obviously they have to be very careful as to how much external headwinds are spreading into the domestic economy,” Hense said.

“If unemployment is picking up then we might have an issue.”


Build bigger


With its infrastructure in poor shape, Germany could think big and commit to higher investment for the next 15 to 20 years, according to Christian Odendahl, the chief economist at the Centre for European Reform in Berlin. Germany is ranked highly in the overall global competitiveness index, but falls short in areas like road quality and internet connectivity.

Such investment programs take longer to implement, but can have a bigger impact. They’d also give companies a reason to buy machinery and expand their capacity at a time when Germany is trying to transform itself in areas such as clean technology.


Tax cuts


Christian Schulz, an economist at Citigroup, said Germany could follow the UK’s example of 2008 and temporarily cut its sales tax to give consumption a boost. That could act as a ‘circuit-breaker’ to prevent a deeper downturn.

Or it could reduce social-security contributions for the poor. Income tax cuts — the typical prescription advice Germany gets — would backfire, Odendahl said, by depriving local governments of their lifeblood for investment.


Cash for clunkers


For a car-loving nation, the government could revisit its 2009 program of rebates for replacing older cars with more fuel-efficient models. As well as aiding a key industry — one whacked by a diesel scandal and trade tensions — the initiative would dovetail with the country’s drive to accelerate the switch to more environmentally friendly energy sources.




The government’s ‘black zero’— or balanced budget — looks at risk. The hurdle for more aggressive spending is high though, and likely to remain so.

“There is a good chance that the black zero will be gone next year because growth assumptions for the budget are too optimistic,” said Schulz at Citigroup.

“Probably there will be a stimulus, but I’m skeptical on large numbers.”



Resource: Bloomberg
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