Lagarde’s Call for German Stimulus Causes Weidmann to Smile

Craig Stirling

02 Mar 2020, 03:19 PM IST

(Bloomberg) -- When Bundesbank President Jens Weidmann was asked if he gets frustrated by frequent calls for a major fiscal stimulus in Germany, he couldn’t help smiling.

That’s how he reacted in an interview with Bloomberg Television’s Matt Miller this week, on a matter where colleagues at the European Central Bank must often be on his case. Since she became the institution’s chief in November, Christine Lagarde has repeatedly argued that countries with the budget space to do so should help out her monetary policy with stimulus of their own.

Lagarde’s Call for German Stimulus Causes Weidmann to Smile

Germany is the ECB’s prime candidate to do that -- along with the Netherlands -- but a preference for fiscal rectitude in both countries is just one of the reasons why they won’t oblige for now. Here’s a closer look at what the Bundesbanker had to say.

I’m Used to This

While Weidmann is a central banker rather than a politician with fiscal responsibility, it’s clear that he often fields comments on the need for a German stimulus.

“You can repeat your arguments, and then explain why you have a different view, and also highlight that we have a specific setting in the euro area, where countries decided to share one monetary policy, but to have independent fiscal policies, and the responsibility for those is at the national level. So it’s a bit inconsistent in that framework, of course, to ask countries to spend for other countries, and the solution for that would be of course either more fiscal integration or a clearer national fiscal responsibility. So it’s a debate we have been used to hear for a while.”

Bridge Building

Whether the stimulus the ECB would want would have much of an effect elsewhere is a moot point anyway. The European Commission said this week that a major investment splurge in Germany, complemented by loose monetary policy, could have “sizable positive spillovers.” But former ECB chief Mario Draghi admitted last year that spending in one country has “limited” effects elsewhere in the region. Weidmann tends to agree.

“The question is, does this really help? How large are the spillovers to other countries? And the calculations that we have done here at the bank highlight that these are rather minimal. I mean, if you construct a bridge here in Germany, does it really benefit other countries to the extent warranted? And I would say, that’s highly unlikely.”

Don’t Dabble

Weidmann was asked about an initiative by Finance Minister Olaf Scholz to suspend the country’s constitutional brake on debt accumulation to help out municipalities, a move that could potentially free up local authorities to spend more. He hinted that he views that as a slippery slope.

“I would caution against undermining the debt brake, because the debt brake has been quite crucial to anchor fiscal policy in Germany, and also to inspire trust in the sustainability of public finances.”

Space to Act

The Bundesbank chief insists that the constitutional limit doesn’t prevent authorities from stimulating the economy anyway, because of the ammunition built up with the country’s successive budget surpluses. There’s also scope to spend more in an emergency, he observes.

“The question is whether the debt brake imposes any impediment to action, and I would argue no, because there are surpluses that we have been observing in the past regarding public finances, so there is some fiscal leeway and there is also flexibilities in some of the rules like the European rules to react to extraordinary circumstances. So the rules allow for space to act.”

Let’s Talk About It

Weidmann acknowledges that the economy could still do with some more fiscal love from its guardians -- just nothing too excessive.

“Of course there is a case for spending, for investing more in Germany -- also targeted public investment is certainly a discussion which we should have.”