Germany Scolded by EU Officials for Frugal Stance Amid Threats

(Bloomberg) --

Subdued public investment in Germany is putting the country’s growth at risk and could weigh on the euro area, the European Commission warned, renewing its call on the region’s biggest economy to ramp up spending.

In a series of reports examining economic imbalances in the European Union, the bloc’s executive arm urged Berlin to do more to address a mismatch between how much it saves and invests despite an improvement in German public finances.

“The subdued net investment share of GDP continues to put at risk Germany’s future growth potential, and has implications for the euro area,” the commission said in the report.

The commission and other institutions have long called on Germany to rebalance its economy by addressing outsize surpluses, advice the government in Berlin has largely ignored.

That push recently received greater urgency amid mounting data showing the German economy has yet to overcome its manufacturing slump, while risks stemming from trade tensions to the coronavirus outbreak loom large.

“Higher public investment would generate positive domestic and cross-border spillovers,” the commission said. “Substantially increasing the public investment rate can boost output and employment in both Germany and the rest of the euro area.”

Investment Simulation

The commission recently complained of a perennial discrepancy where countries that should tighten belts actually spend more, while those that ought to loosen fiscally to boost growth across the region tend to be overly frugal. Making matters worse, countries don’t put finances in order in good times, nor are there sufficient incentives in the rulebook to boost investment and spur growth in a downturn.

Germany stands out as the only Group of Seven member with a budget surplus, and a relatively low debt burden. It has been the key target of the European Central Bank’s calls for governments with fiscal space to ramp up spending, and for Brussels officials seeking a common budget tool. The country shows little sign of giving ground though that won’t stop people trying.

In the report on Wednesday, the commission ran a simulation under which Germany raises public investment by 1 percentage point of output over a decade. Such stimulus is necessary, officials say, for Germany to finance the transition to a low-carbon economy, and meet transport and digital transformation needs.

Under this assumption, euro-area gross domestic product would be higher by 0.4% this year and next, and 0.3% higher in 2022. The scenario assumes that the ECB maintains its loose monetary policy for another two years, and gradually normalizes thereafter.

--With assistance from Nikos Chrysoloras.

To contact the reporter on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Craig Stirling, Zoe Schneeweiss

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