IMF Urges German Government Spending to Revive Flagging Economy

(Bloomberg) -- Germany shouldn’t wait for an economic shock before boosting public investment, according to the International Monetary Fund, which said the nation faces structural challenges that are best addressed now.

Europe’s largest economy has a “broad range” of long-term issues including infrastructure, digitization and the participation of women in the workforce that it could spend money on, Poul Thomsen, the head of the IMF’s European department, said in an interview in Brussels. “Germany is not constrained by debt levels from pursuing such good fiscal, structural measures.”

Chancellor Angela Merkel’s government has come under pressure in recent months over its budget surpluses, which trading partners see as unnecessarily austere at a time when the euro-area economy is struggling, and European Central Bank President Mario Draghi has repeatedly called on nations with “fiscal space” to use it.

U.S. President Donald Trump’s Treasury Department, in criticizing the size of Germany’s current account surplus, also said this year that Berlin should “take meaningful policy steps to unleash domestic investment and consumption.”

German Finance Minister Olaf Scholz said on Tuesday that the government will stick with a balanced budget next year but is ready to act with “many billions” should its economy and that of Europe head into recession. He and Merkel have so far resisted widespread calls to abandon the policy of running balanced budgets, though the finance minister has begun to change his tone, emphasizing the need for large-scale investments.

Thomsen said the country doesn’t yet need fiscal stimulus for “cyclical reasons,” but that shouldn’t stop it from pursuing sensible long-term projects. In a similar vein, countries with a high debt burden such as Italy should continue improving public finances and such action should only be delayed in case of a “marked downturn,” he said.

The ECB will decide this week how to counter the current economic downturn by digging even deeper into its policy toolbox. It is widely expected to cut interest rates even further below zero, though Draghi is facing a divided Governing Council on whether to resume quantitative easing just yet.

He’ll probably reiterate his call for countries to use the fiscal space they have -- and the message won’t get any softer when he steps down at the end of October. Former IMF chief Christine Lagarde will replace him.

“We clearly are getting to the point where monetary-policy effectiveness becomes more limited,” Thomsen said. “It is not out of ammunition, but one would have to rely increasingly more on fiscal policy.”

To contact the reporters on this story: Alexander Weber in Brussels at aweber45@bloomberg.net;Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Andrew Atkinson, Paul Gordon

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