Germans press Merkel to spur spending

Germans press Merkel to spur spending
German Chancellor Angela Merkel.

BERLIN - German Chancellor Angela Merkel is facing one of the toughest tests of her decade-long rule as pressure grows for her to step up government spending in order to avert the risk of Europe sliding into another economic recession.

For the moment, the answer from her is "No".

"We cannot spend money we don't have to solve Europe's problems," Mr Peter Altmaier, the influential chief of staff of Chancellor Merkel's office, told a gathering of senior European politicians and experts in the German capital earlier this week.

But the pressure on the German government to change course in order to kick-start the continent's economic growth is no longer coming just from other Europeans; it is also becoming increasingly vocal within Germany itself.

Mr Ulrich Grillo, the influential president of Germany's BDI industry federation, has called on his government to present an "action plan for public investment".

Meanwhile, the Suddeutsche Zeitung, one of Germany's top daily newspapers, compared the Chancellor and her ruling Christian Democrats to far-right politicians in the United States, warning that they risk turning into "Tea Party of Europe" with their single-minded focus on deficit reduction.

Although Germany is Europe's single largest economy, its dominance over the continent is nowhere near as big as commonly assumed. The country accounts for 29 per cent of gross domestic product in the Eurozone, but France accounts for 21 per cent, followed by Italy with 16 per cent and Spain with 11 per cent, and all these nations are critics of German economic priorities.

Still, until now the German argument that all European countries should give priority to the swift reduction of their government debts regardless of the pain this inflicts prevailed, largely because nobody dared cross Dr Merkel, the only European leader who commands enough financial resources to bail other Europeans from potential bankruptcy.

Germany's public finances also look to be in good shape, allowing it to continue portraying itself as a saint among fiscal sinners: Its government will again run a small surplus this year compared with substantial deficits elsewhere in the Eurozone.

But Germany's national statistics office said last week that exports slumped by 5.8 per cent in August, the steepest one-month fall since 2009, when Europe plunged into its financial crisis.

As a result, the German government has now admitted that growth this year may be no higher than 1.3 per cent, with a further decline to only 1.2 per cent next year.

The unexpected downturn appears to vindicate Germany's critics, who have long argued that the country is far too dependent on exports, and that its true economic potential is being held back by abnormally weak public and private spending: net public investment is currently negative, which means that Germany is not investing enough to replenish the country's public capital stock of roads, railway, bridges and other public infrastructure.

Unusually for a country which has elevated the prudent management of finances to the status of a religion, the argument that Chancellor Merkel should borrow money for government-funded projects is now gaining a surprising number of supporters within Germany itself.

More ominously for her is the fact that other European countries are now seizing on what they perceive as her moment of weakness to defy the entire austerity agenda.

France last week presented a budget which simply ignores deficit targets. And in Italy, Prime Minister Matteo Renzi now claims that he can do nothing to repair his country's finances without "a Europe-wide pro-growth policy", a coded appeal for extra German spending.

Dr Merkel has no intention of "writing cheques" as she dismissively puts it, partly because she genuinely does not believe that public spending is a good pathway to economic recovery, but also because she fears that, once Germany accedes to requests to borrow and spend more, other European governments will immediately abandon their own austerity measures, thereby risking another Europe-wide financial crisis.

Besides, Germany is constrained by a recent amendment in its constitution to run balanced budgets by 2016, so any change in policies would entail a change in fundamental laws as well. As a result, austerity German-style is likely to stay in place.

But noted financial experts warn that the combination of German intransigence, lower economic growth and the inability of other European countries to bear the pain of austerity could prove lethal for the continent.

As Mr Simon Tilford from the Centre for European reform think-tank in London pointed out recently, the Merkel government's behaviour is "a recipe for stagnation, deflation and political populism in France and Italy".

It may, he warned, lead to a breakdown in relations between Germany and fellow EU countries.

This article was first published on Oct 22, 2014.
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