Germany Faces Pressure to Spend as Economic Risks Grow in Europe

(Bloomberg) -- Trade tensions and uncertainty surrounding Brexit are raising economic risks for the euro area, prompting France to urge Germany to loosen its purse strings to support growth.

"It would be irresponsible not to examine the need for new investments in the euro zone," French Finance Minister Bruno Le Maire said on Saturday at an annual economic conference in Aix-en-Provence, in southern France.

Increased spending is under discussion between France and Germany, and is one of the biggest points of divergence between the neighbors, he added.

"Now is the time to invest in innovation and infrastructure, not in social spending," he said, citing the negative impact of trade tensions between China and the United States on economic growth, and accommodating monetary policy and negative interest rates that could ease the cost of spending.

A slump in German factory orders in May is the latest sign that global trade uncertainty is turning Europe’s temporary slowdown into a more serious downturn. The region’s biggest economy reported huge declines in export orders and investment goods after a survey showed factory activity shrank for a sixth month in June. The continued gloom is increasing concern at the European Central Bank, and a growing number of economists are predicting it will add more monetary stimulus as soon as this month.

Risks are such that the ECB may have to take action even before newly nominated head Christine Lagarde takes over in October, Societe Generale SA Chairman Lorenzo Bini Smaghi said in an interview. Any action would also depend on the course taken by the Federal Reserve later this month.

Brexit Uncertainty

“We have all the factors of uncertainty,” the economist and former ECB executive board member said at the Aix-en-Provence conference, also citing uncertainty surrounding the U.K.’s plan to leave the European Union later this year. “At some point the slowdown may reach bottom, and we want to have the monetary instruments in place to avoid that this becomes a recession.”

Despite a slowing economy that could arguably benefit from a fiscal boost, Germany is running a large budget surplus and reducing a relatively low debt burden, which stands at close to 60 percent of gross domestic product. France’s was just under 100 percent in the first quarter.

"Germany is among countries that have room to increase their debt load, along with the Netherlands, while others, including France and Italy, need to be on a path to reduce it despite low interest rates," said Odile Renaud-Basso, the head of the French treasury. "A debt load approaching 100 percent of gross domestic product doesn’t have an impact when markets are confident but it is politically symbolic and it’s a fragility factor in the longer term."

Le Maire said he planned to broach the topic with German Christian Democratic Union party chief Annegret Kramp-Karrenbauer, who took over from Chancellor Angela Merkel and was also in Aix-en-Provence.

“The main task for Germany is to see where we break ground, through new technology, innovation and new business models,” she said in an interview. “We need to speed up processes. We have too much bureaucracy. These changes have less to do with money.”

Germany’s export-oriented economy has less to do with a lack of financing than a reaction to the growing trade conflict, said the frontrunner of the party to succeed Merkel as chancellor.

"Germany’s approach needs to change, and go towards more debt and investment as well as respecting EU rules on debt," Henrik Enderlein, professor of political economy at the Hertie School of governance in Berlin, said at the conference. "It’s currently got margins of maneuver."

--With assistance from Angelina Rascouet, Caroline Connan and Birgit Jennen.

To contact the reporters on this story: Angeline Benoit in Paris at abenoit4@bloomberg.net;Caroline Connan in Paris at cconnan@bloomberg.net;Ania Nussbaum in Paris at anussbaum5@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel, James Regan

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