Holding Off Stimulus in Germany Isn’t Just Political Mantra

Craig Stirling and Birgit Jennen
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Holding Off Stimulus in Germany Isn’t Just Political Mantra

(Bloomberg) -- When German officials get nagged about delivering major fiscal stimulus, they have plenty of answers ready for why now isn’t the moment.

“I think we did a lot,” Finance Minister Olaf Scholz said in a Bloomberg Television interview in Washington on Friday. “The more important question is what will happen to the global economy.”

Germany’s arguments don’t just rely on the national fixation with budget prudence and the avoidance of debt though. Officials also cite their assessment of the current situation in Europe’s biggest economy, as well as tactical considerations on how a stimulus package would be effective.

Such reasoning might be used often this week in Washington as Scholz and colleagues attend meetings of the International Monetary Fund, which on Tuesday called for Germany to invest more and reduce taxes to aid its faltering economy. Two days later, Chancellor Angela Merkel’s government cut its growth forecast for 2020 to just 1%, after earlier predicting 1.5%. Data due next month may even show the economy has just slipped into recession.

The IMF is far from alone. Outgoing European Central Bank President Mario Draghi said last month that it is time for “fiscal policy to take charge” in the region, and is likely to repeat that refrain at his final meeting next week. Germany, with ample fiscal space built on repeated budget surpluses, is a prime candidate.

Angel Gurria, chief of the Organization for Economic Cooperation and Development, made a similar call on Thursday in Washington.

“Even the central banks run out of ammunition -- right now, we have to complement their easing,” he told Bloomberg Television. “Countries that have room, that do not have a very big debt-to-GDP ratio, they should spend more.”

Scholz said recent measures in Germany, such as higher public investment and tax cuts for individuals, will boost growth. “And this is in a situation when the economy is still stable” and employment is high, he said.

While the opposition by some German lawmakers to a fiscal boost is starting to thaw, the government is holding firm for now. Here’s a look at some of the arguments they’re deploying to keep calls for stimulus at bay, based on public statements, private briefings, and confidential conversations with officials.

Studying the Cycle

One argument is that Germany’s slowdown doesn’t fundamentally stem from domestic weakness and the economic cycle. It’s a result of external and political factors, including global trade tensions and Brexit-related disruption. Such a situation isn’t best served by a classic stimulus response and doesn’t need measures that would normally counter the ebbing of the cycle.

It’s Not Appropriate

A continuation of that point is that the economy is actually close to its speed limit, with areas such as construction, where a lack of workers is causing bottlenecks, threatening to constrain expansion. Bundesbank President Jens Weidmann argued that on Wednesday, saying calls for German fiscal stimulus are “completely disconnected” from reality.

“The economy is working with an almost-closed output gap,” he said in response to questions at an event in New York. “Why would you spend money when you are operating at full capacity?”

Two-Speed Economy

German weakness has generally been limited to manufacturing and isn’t widespread, runs another argument. The auto industry has suffered from trade tensions and a slow response to the global shift toward electric vehicles. But the domestic economy remains healthy, thanks to unemployment near a record low and the benefits of extreme monetary easing.

The line of reasoning holds that past spillovers from the industrial sector to the consumer aren’t happening this time, because the link between the two is weaker than it was.

“It’s a two-speed Germany,” Trevor Greetham, head of multi-asset management at Royal London Asset Management, told Bloomberg Television. “The consumer is okay, and the housing market is actually rising quite strongly.”

The Time Isn’t Right

Another view holds that a major budget stimulus should only be unveiled when it’s widely perceived to be needed. A fiscal boost may be more potent if announced at a time when things are really seen to be deteriorating. That was the experience in 2009 during the global financial crisis. But if ordinary people aren’t much feeling the effects of economic weakness, stimulus now could be less efficient than it otherwise would be.

It Needs Thought

A further point Weidmann made this week is that stimulus should be well aimed and not just delivered for the sake of it, suggesting the need for caution. He recommended targeted spending on infrastructure, research and education, and incentivizing work and investment through tax cuts.

“It would be important to use the leeway wisely in order to promote sustainable growth in the long run and not just cause a flash in the pan,” he said.

Merkel argued last month that simply spending cash isn’t what’s needed, saying “it’s currently not a lack of money” that’s the problem, and there are sufficient investment projects in the pipeline. They just need to be fast-tracked.

(Updates with finance minister’s interview in second and eighth paragraphs)

--With assistance from Francine Lacqua and Lucy Meakin.

To contact the reporters on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net;Birgit Jennen in Berlin at bjennen1@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Paul Gordon, Jana Randow

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