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For Europe, There’s an Upside to Germany’s Slowdown

Posted by hkarner - 8. Juli 2019

Date: 07-07-2019
Source: The Wall Street Journal

Loss of momentum could coax the government in Berlin to open its wallet

Germany has emerged as a major victim of global uncertainties because of its heavy reliance on exports, which account for 47% of its economic output. Employees at a BMW factory in Leipzig.

Germany’s economic slowdown, though no doubt bad for Europe in the short term, could be helpful over a longer period by easing a rift between the region’s economically stronger north and weaker south over pro-growth policies.

The country accounts for nearly a third of all economic activity in the eurozone, but no European Union economy grew more slowly in the year through March, aside from Italy. That puts Germans more in sync with the rest of the region as global growth cools, Brexit drags on and trade tensions linger between the U.S. and China.
Germany’s loss of momentum could make it easier for European Central Bank President Mario Draghi and his likely successor, Christine Lagarde, to convince a skeptical German public of the need for a longer period of low interest rates or increased government spending, analysts say.

The German government has considerable room to boost spending, having run budget surpluses for the past five years.
The eurozone has an unimpressive record when it comes to handling economic setbacks, having responded late and indecisively to mounting government debt and banking problems in the years after the global financial crisis.

That was partly a reflection of the eurozone’s north-south divisions, with Germany prospering while Greece slid further into crisis. Germans also tend to be more skeptical than others on the continent about the need for government policies to smooth out the rougher edges of business cycles.

What’s different this time around is that wealthy and populous Germany is set to suffer most, which could make it more open to stimulus measures.

Germany’s economy grew just 0.7% in the 12 months through March, far behind Spain’s 2.4% rate and even the Brexit-buffeted U.K. pace of 1.8%. Germany has emerged as a major victim of global uncertainties because of its heavy reliance on exports, which account for 47% of its economic output, compared with just 12% for the U.S. The German job market, until recently a pillar of strength, appears to be softening.

This is playing into a national debate over how to use government spending to support major economic projects, such as the transition to a digital economy and the switch to battery-powered vehicles.

“In a downswing it’s easier for policy makers to convince Germans of the need for stimulus, even if there is still underlying skepticism,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.

German officials have long resisted international calls to stimulate their economy, but that attitude has started to soften this year.

Jens Weidmann, the hawkish head of Germany’s Bundesbank, has backed both moves by the ECB this year to inject fresh stimulus into the eurozone economy. When the ECB ramped up its stimulus in early 2016, a move opposed by Mr. Weidmann, Germany was the fastest-growing major advanced economy. His compliance now makes it easier for the ECB to act at a time when its policy arsenal is already depleted.

German Chancellor Angela Merkel’s government is cautiously loosening its purse strings after years focused on paying down the national debt. Public investment will reach a record of about €40 billion ($45 billion) next year, up from €25 billion in 2014.

While increased spending reflects Germany’s solid fiscal position, the current downturn is playing into the debate, says Holger Schmieding, chief economist at Berenberg Bank in London. He expects public spending will boost German growth by as much as 0.7 percentage point this year.

Politicians from the Green Party, which recently overtook Ms. Merkel’s Christian Democrats in public opinion polls, have criticized strict legal limits on new public debt, known as the debt brake.

“There is some softness in the German economy but also a realization that Germany cannot go on with a policy of continuing to save rather than to invest,” said Paul de Grauwe, a former Belgian lawmaker who is now a professor at the London School of Economics.

German business leaders are also calling for greater public investment to address a deficit in technology, such as broadband infrastructure.

“A change of direction is necessary, government policies are hurting businesses,” said Dieter Kempf, president of the Federation of German Industries, in a speech last month.

While the ECB appears prepared to respond to a deeper economic slowdown, economists say its means are limited because its key interest rate is below zero.

Instead, international bodies like the Organization for Economic Cooperation and Development have urged eurozone governments to work together to boost spending to spur growth. But the eurozone has no formal way to launch a coordinated fiscal plan.

That leaves the job of using budget policies to stave off a recession to individual governments. Fortunately for the eurozone, the economies that are most vulnerable to a trade slowdown are those—like Germany—that have the largest budget surpluses. They therefore have room to cut taxes or increase spending.

Still, it wouldn’t bode well for the eurozone if it takes a downturn in Germany to create harmony over stimulus policies.

“It would be unfortunate if bad news for Germany ended up being good news for Europe by enabling agreement on common policies,” said Stefan Gerlach, a former deputy governor of Ireland’s central bank. “A bunch of warning signs should go off.”

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