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Europe talks up public spending to stave off economic slowdown, but not yet

The call from business leaders is also growing louder

Alessandro Speciale & Sonia Sirletti | Bloomberg 

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Europe’s largest economy shrank in the second quarter but politicians are still loathe to give up the country’s balanced budget policy

European policy makers are talking up their readiness to step up public spending to stave off an economic slowdown. The catch is, the moment for turning words into action seems still far off. Nowhere is this debate felt more than in Germany. Europe’s largest shrank in the second quarter but politicians are still loathe to give up the country’s balanced budget policy.

“It’s a lively discussion, of course,” German Deputy Finance Minister Jorg Kukies said in a Bloomberg TV interview with Francine Lacqua from Cernobbio, Italy. Germany “has the power to react if and when needed. At the moment we see that hasn’t come yet. But if it were needed, we’d be ready to act.”

Kukies had the opportunity to feel the mounting pressure at the Ambrosetti Forum where the Italian and elite gathered. French Finance Minister Bruno Le Maire said that Germany has the capacity to invest more and it’s in its own interest to do so.

“I’m not asking Germany or any other country ‘Please spend more money’ and we do nothing, I’m not expecting that,” Le Maire told reporters. But, he added, there is the need to have “more investments in the countries which do have the fiscal space to do so, so that’s clearly the case in Germany.”

The call from business leaders is also growing louder. Continental AG chief executive officer Elmar Degenhart said in an interview with the Frankfurter Allgemeine Sonntagszeitung that now would be the time for “stimulus measures” to counter the risk of a deep recession. Algebris Investment CEO Davide Serra said Saturday should stop being afraid of deficit spending if it wants to stay “competitive” with the U.S.

On the background of today’s debate is the failure of euro-area countries to agree on a fund capable of pumping money and counter a slump.

Ten years after the sovereign debt crisis wrecked the currency bloc, negotiations on a joint budgetary instrument are still far from completion. The head of the region’s finance chiefs, Portugal’s Mario Centeno, remains optimistic that it will see the light in coming years.

Stimulus

In the meantime, “some of the countries are already preparing to act if necessary,” Centeno said in a Bloomberg TV interview with Flavia Rotondi from Cernobbio. “I think we have the means in a moment of crisis.”

To be sure, the global economic slowdown together with Trump’s threats of tariffs on the vital car industry are slowly shifting the debate in Germany.

Chancellor Angela Merkel last month reaffirmed her determination to avoid deficit spending but acknowledged that the is sputtering. The government will react “depending on the situation,” she added, and politicians have signaled their readiness to expand infrastructure and climate-related investment.

Finance Minister Olaf Scholz has stated publicly that, in case of a recession, the government could muster 50 billion euros ($55 billion) for stimulus.

As politicians debate, monetary policy seems to be on the verge of filling up the void once again. The European Central Bank is expected to cut rates and possibly restart asset purchases on Thursday, though President Mario Draghi is facing a stronger resistance than in the past. Speaking in Cernobbio, his deputy, Spain’s Luis De Guindos, stood clear from any policy signal but made clear once again that monetary policy can’t face the slowdown on its own.

“Fiscal policy can play a greater countercyclical and stabilizing role,” he said. “Fiscal space should be used wisely in countries where it exists.”

First Published: Sat, September 07 2019. 23:03 IST
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