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As Growth in Germany Fades, Merkel Hints at a Shift in Economic Policy As Growth in Germany Fades, Merkel Hints at a Shift in Economic Policy
(about 1 hour later)
FRANKFURT — As evidence grew on Thursday that the German economy, the largest in Europe, was beginning to stall, Chancellor Angela Merkel expressed a growing willingness to use government spending to stimulate growth, a possible shift in position that could ripple across the entire eurozone. As evidence grows that the German economy, the largest in Europe, is beginning to stall, Chancellor Angela Merkel expressed a growing willingness to use government spending to stimulate growth, a possible shift in position that could ripple across the entire eurozone.
Ms. Merkel’s new tack, signaled in a Berlin news conference, may be partly a response to increasingly clamorous criticism from economists and fellow Europeans that her longstanding emphasis on balancing the federal budget needs to give way to pumping government money into the lethargic German economy. Ms. Merkel’s new tack, signaled in a Berlin news conference on Thursday, may be partly a response to increasingly clamorous criticism from the International Monetary Fund, independent economists and fellow Europeans that her longstanding emphasis on balancing the federal budget needs to give way to pumping more money into the lethargic German economy.
If Germany in fact gives itself a bit more spending latitude, it would no doubt fuel the demands from its eurozone neighbors, most notably France, to have more budgetary flexibility to stimulate their own economies.If Germany in fact gives itself a bit more spending latitude, it would no doubt fuel the demands from its eurozone neighbors, most notably France, to have more budgetary flexibility to stimulate their own economies.
Mainly, though, its neighbors are counting on Germany to lead by example.Mainly, though, its neighbors are counting on Germany to lead by example.
As the biggest economy in the 18-member eurozone and the one that in recent years was growing enough to at least partly offset economic softness elsewhere in the region, Germany drives economic demand in the bloc. Other countries in the region have watched with growing alarm as indicators have suggested that the standard-bearer might be stumbling. International economists have repeatedly called for Germany to stop worrying about balancing its budget and instead invest in economic stimulus. As the biggest economy in the 18-member eurozone and the one that in recent years was growing enough to at least partly offset economic softness elsewhere in the region, Germany drives demand in the bloc. Other countries in the region have watched with growing alarm as indicators have suggested that the standard-bearer might be stumbling. International economists have repeatedly called for Germany to stop worrying about balancing its budget and instead invest in economic stimulus.
On Thursday, Mario Draghi, president of the European Central Bank, said in effect that eurozone countries that have money should spend it — a clear reference to Germany. On Thursday, Mario Draghi, president of the European Central Bank, said in effect that eurozone countries that have enough money should spend it — a clear reference to Germany.
“For governments that have fiscal space, then of course it makes sense to use it,” Mr. Draghi said during an appearance at the Brookings Institution in Washington. He drew laughter when he added, “You decide to which country this sentence applies.”“For governments that have fiscal space, then of course it makes sense to use it,” Mr. Draghi said during an appearance at the Brookings Institution in Washington. He drew laughter when he added, “You decide to which country this sentence applies.”
Discouraging data in recent days, as well as a warning on Thursday by the nation’s leading economic institutes that German growth is slowing, seem to have increased Ms. Merkel’s willingness to listen to Mr. Draghi’s advice. His comments echoed remarks this week from Christine Lagarde, the head of the I.M.F.
Faced with what she acknowledged were “somewhat worsened” forecasts for the German economy, Ms. Merkel said in Berlin on Thursday that her government was examining how to encourage investment, particularly in the “digital sphere” and the energy sector. Discouraging data in recent days, as well as a warning on Thursday by the nation’s leading economic institutes that German growth is slowing, also seem to have increased Ms. Merkel’s willingness to listen to the advice of Mr. Draghi and Ms. Lagarde.
Ms. Merkel did not elaborate, but she could have been referring to ways the government could encourage more Internet start-ups. Germany, and Europe in general, has never produced anywhere near as much digital innovation as Silicon Valley. Faced with what she acknowledged were “somewhat worsened” forecasts for the German economy, Ms. Merkel said that her government was examining how to encourage investment, particularly in the “digital sphere” and the energy sector.
The reference to energy came with a mention of giving a new push to Germany’s program to abandon nuclear power and expand renewable energy sources. It might be a recognition, too, that lower energy costs in the United States have been luring away investment by German companies. While energy prices in Europe have fallen recently, the region in the longer term is highly dependent on imported gas and oil, often from countries like Russia that are unstable partners. Ms. Merkel did not elaborate, but she could have been referring to ways the government could encourage more Internet start-ups. Germany, like Europe in general, has never produced anywhere near as much digital innovation as the United States or South Korea.
The reference to energy suggested a new push to Germany’s program to abandon nuclear power and expand renewable energy sources. It might be a recognition, too, that lower energy costs in the United States have been luring away investment by German companies. While energy prices in Europe have fallen recently, the region is highly dependent on imported gas and oil, often from countries like Russia or in the Middle East that are unstable partners.
The German national statistics office said on Thursday that exports slumped 5.8 percent in August compared with July, more than expected. It was the sharpest drop since 2009, in the aftermath of the global financial crisis. And it was the latest in a series of indications that Germany’s export-driven economy was losing momentum, in part because the conflict in Ukraine has made businesses cautious and unwilling to invest.The German national statistics office said on Thursday that exports slumped 5.8 percent in August compared with July, more than expected. It was the sharpest drop since 2009, in the aftermath of the global financial crisis. And it was the latest in a series of indications that Germany’s export-driven economy was losing momentum, in part because the conflict in Ukraine has made businesses cautious and unwilling to invest.
Ms. Merkel said her government, a grand coalition of the political center-right and center-left, had discussed the economy at a meeting late on Tuesday. American policy makers and economists increasingly are worried that Europe’s economic problems will weigh on domestic growth by reducing demand for exports from the United States and by suppressing price inflation.
Stanley Fischer, the vice chairman of the Federal Reserve, said Thursday that the Fed was watching closely, but it was premature to consider policy adjustments.
“We have to take into account the impact on aggregate demand,” Mr. Fischer said at the Brookings Institution, where he shared the stage with Mr. Draghi. “We’ll be judging what’s happening to output and inflation, and acting on that basis.”
In Berlin, Ms. Merkel said her government, a grand coalition of the political center-right and center-left, had discussed the economy at a meeting late on Tuesday.
“This course we will now pursue very decisively, and also discuss within Europe,” she added, apparently referring to a meeting of European Union leaders later this month in Brussels.“This course we will now pursue very decisively, and also discuss within Europe,” she added, apparently referring to a meeting of European Union leaders later this month in Brussels.
Ms. Merkel’s remarks may have been less a declaration of policy change than a signal that her thinking on stimulus is evolving. Wolfgang Schäuble, the German finance minister, speaking in Washington on Thursday, insisted that “writing checks” was no way for the eurozone to increase growth, according to Reuters. Mr. Schäuble urged France and Italy to do more in the way of economic reform. Ms. Merkel’s remarks may have been less a declaration of policy change than a signal that her thinking on stimulus is evolving.
His statement could indicate that Germany’s willingness to deploy fiscal stimulus might depend on whether its eurozone partners did their part by deregulating their labor markets and implementing other politically painful changes to encourage entrepreneurship. Wolfgang Schäuble, the German finance minister, speaking in Washington on Thursday, insisted that “writing checks” was no way for the eurozone to increase growth, according to Reuters. Mr. Schäuble urged France and Italy to do more to overhaul their economies instead.
His statement could indicate that Germany’s willingness to deploy fiscal stimulus might depend on whether its eurozone partners did their part by deregulating their labor markets and making other politically painful changes to encourage entrepreneurship.
It is clear in any case that the debate in Europe has shifted away from single-minded emphasis on budgetary austerity. Mr. Draghi has also become increasingly frank in expressing the European Central Bank’s determination to use all the powers at its disposal to reverse a slide in inflation to levels considered dangerously low.It is clear in any case that the debate in Europe has shifted away from single-minded emphasis on budgetary austerity. Mr. Draghi has also become increasingly frank in expressing the European Central Bank’s determination to use all the powers at its disposal to reverse a slide in inflation to levels considered dangerously low.
Speaking in Washington on Thursday, Mr. Draghi said the E.C.B. had begun a shift to a more active monetary policy less dependent on the behavior of banks. The bank has already announced a program to buy private-sector assets, and Mr. Draghi repeated on Thursday that the central bank was willing to go further — a reference to large-scale purchases of government bonds. Speaking in Washington on Thursday, Mr.Draghi said he was optimistic that eurozone political leaders would undertake difficult economic changes, because their survival depended on it.
Mr. Draghi said he was optimistic that eurozone political leaders would make difficult reforms, because their survival depended on it.
“It seems to me that now all of these governments have a very powerful incentive to do the right things,” he said. “And that is: If they don’t do the right things they will disappear forever from the political scene because they will not be re-elected.”“It seems to me that now all of these governments have a very powerful incentive to do the right things,” he said. “And that is: If they don’t do the right things they will disappear forever from the political scene because they will not be re-elected.”
Ms. Merkel’s remarks in Berlin came after four of Germany’s most respected economic institutes revised their projections for growth sharply downward. Gross domestic product this year is expected to expand 1.3 percent, compared with a forecast of 1.9 percent six months ago, the institutes said in a joint statement. Next year, growth is forecast at 1.2 percent instead of a previous 2 percent, they added. Along the way, they predicted, the German economy will show zero growth for the current quarter and will barely eke out 0.1 percent growth in the fourth quarter.Ms. Merkel’s remarks in Berlin came after four of Germany’s most respected economic institutes revised their projections for growth sharply downward. Gross domestic product this year is expected to expand 1.3 percent, compared with a forecast of 1.9 percent six months ago, the institutes said in a joint statement. Next year, growth is forecast at 1.2 percent instead of a previous 2 percent, they added. Along the way, they predicted, the German economy will show zero growth for the current quarter and will barely eke out 0.1 percent growth in the fourth quarter.
Despite its reputation as one of Europe’s best-performing economies, Germany still suffers from excessive regulation, and the costs to start a business remain high compared with other countries, the institutes said. Indeed, Ms. Merkel on Thursday specifically mentioned reducing bureaucracy as one way forward.
Separately, some economists are predicting a quarter or two of contraction before German growth resumes.Separately, some economists are predicting a quarter or two of contraction before German growth resumes.
German leaders have faced criticism for their obsession with reducing the budget deficit at a time when the country is able to borrow money at record low rates, and when roads, bridges and university campuses are deteriorating. At times, German bonds have carried negative interest rates, meaning investors are effectively willing to pay the government to keep their money safe.German leaders have faced criticism for their obsession with reducing the budget deficit at a time when the country is able to borrow money at record low rates, and when roads, bridges and university campuses are deteriorating. At times, German bonds have carried negative interest rates, meaning investors are effectively willing to pay the government to keep their money safe.
Ms. Merkel and Mr. Schäuble have a habit of hinting at policy shifts almost in asides before announcing action. The chancellor’s remarks on Thursday came in response to a question about the economic prospects, at a news conference with the new prime minister of Poland, Ewa Kopacz. Ms. Merkel and Mr. Schäuble have a habit of hinting at policy shifts almost in asides before announcing action. The chancellor’s remarks on Thursday came in response to a question about economic prospects, at a news conference with the new prime minister of Poland, Ewa Kopacz.
The government “has taken note” of the latest prognoses, Ms. Merkel said. “It did not surprise us” because there had been several indications that economic indicators had “somewhat worsened,” she added.
In a note to clients, Carsten Brzeski, an economist at ING, said that the magnitude of the fall brought back memories of the peak of the financial crisis. “The economy seems to need a small miracle in September to avoid a recession in the third quarter,” he wrote.