Prolonged German downturn could prompt stimulus rethink
The last thing the faltering European economy would appear to need right now is a sudden downturn in Germany, hitherto the bloc’s pillar of strength.
But a bout of German weakness may be precisely what is required to convince Angela Merkel to loosen the fiscal reins at home and provide Europe with a dose of stimulus that struggling states like France and Italy have long been seeking.
For now, the top economic priority of Merkel’s government is to deliver on its promise of a “schwarze Null” – a federal budget that is in the black, or fully balanced – in 2015.
It is largely due to the constraints of this budget target that Merkel has repeatedly rebuffed calls at home and abroad for Berlin to splash out more public money on infrastructure.
“If the only way to achieve the balanced budget goal is to make cuts that would deepen a recession, it will be abandoned and we will see more spending,” said one senior German official, who requested anonymity due to the sensitivity of the issue.
Another official close to the chancellor said: “If the German economy weakens substantially, that would be a game changer.”
“Of course there is a risk for the balanced budget goal if the economy weakens considerably,” said Eckart Tuchtfeld, an economist at Commerzbank who focuses on budget issues.
Still, recent German data has been unusually poor. This week industrial orders and output for the month of August posted their steepest falls since the height of the global financial crisis in 2009.
“The risks to the German economic outlook are high,” said Marcel Fratzscher of the DIW economic institute in Berlin, citing weakness in the euro area, political risks in France and Italy, looming stress tests that could expose troubles at European banks, and geopolitical threats from Ukraine and the Middle East.
Source: reuters- Prolonged German downturn could prompt stimulus rethink
