Germany again defended its economic surplus on Thursday, despite increased criticism from the International Monetary Fund (IMF) and Europe.
Jens Weidmann, president of the German central bank, all but ruled out an increase in public spending during a speech.
“Raising public spending in order to reduce Germany’s current account surplus would likely be a futile undertaking as well,” he said.
Weidmann said that, based on macro-econometric simulations, even if Germany were to increase public investment by 1 percent of gross domestic product (GDP) over a two-year period, this would have a “very small” impact on other euro economies.
Germany has been often criticized for not using its budget leeway to make further investments, which ultimately could help out other embattled euro economies.
On Wednesday, IMF Managing Director Christine Lagarde wrote that it’s time for Germany to find the best way to boost public spending.
“We at the IMF see a particularly strong case to use headroom in the budget to invest more in public infrastructure, such as roads, railways, and digital infrastructure,” Lagarde wrote.
“We have also advised the government to spend more on reforms that help women go back to work, such as opening more childcare centers and kindergartens. Our view is that higher growth in the long-term will improve prosperity, helping to offset the costs of an aging society.”
Late last year, the European Commission voiced a similar view. “Those who have budgetary leeway should spend and invest more for themselves and in the interests of all,” Pierre Moscovici, the commissioner for economic affairs, said.
However, in the eyes of the Bundesbank president, it is prudent to keep a positive output gap to ensure Germany’s finances won’t be damaged when demographic pressures kick in.
According to Daniel Gros, director of the Brussels-based think-tank Center for European Policy studies, the German finances “might appear better than what they are, really.”
He told CNBC Thursday that when taking a long-term view, there are risks from an ageing population, for example. This will increase costs with pensions and healthcare and raise questions over the future stability of the labour market, he said.
“So yes, Germany got to this point (economic surplus) because fiscal policy was prudent overall, but the only way to maintain the lead is by remaining prudent,” Gros said.
Following a general election last September, Germany still remains without a formal government. However, analysts do not see any short-term economic impact from that.
“So far we haven’t seen any negative impact of the political situation on the German economy,” Peter Bofinger, member of the German Council of Economic Experts, told CNBC on Thursday morning. “The Germany economy will survive in the next three, four months if we don’t have a government.”
The Social Democrats will decide this weekend whether it will officially form a coalition with the conservative party led by Angela Merkel. There seems to be a high degree of division among the socialist party as to whether or not it should join forces with Merkel.
Without an agreement between the two, new elections will be called, which could bring economic instability for Germany and Europe.
“It’s very decisive we get this coalition because otherwise if we have new elections, the result (no outright majority) could be again the same,” Bofinger said.
“This could mean a lot of stagnation (in German politics),” he said, adding that it would be “more of a problem for Europe,” where France has very clear proposals to deepen euro zone integration that it wants to approve and Germany is needed to bring these to practice.
Source: cnbc
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