Coronavirus and Merkel’s quest for legacy speed up German rebalancing
A coronavirus-induced plunge in German exports and a fiscal U-turn by Chancellor Angela Merkel as she seeks to cement her place in history are accelerating a long demanded rebalancing of Europe’s largest economy.
For years, Germany’s huge trade surpluses and its hesitancy to stimulate domestic demand with substantial infrastructure spending have frustrated international organizations and European allies who argue Berlin could do more at home to support growth elsewhere.
The trade surplus has also been used by U.S. President Donald Trump to underline his America First narrative that Germany was exploiting the United States, the world’s largest economy.
But with the coronavirus pandemic disrupting trade across the globe and Merkel turning Germany’s traditionally cautious fiscal policy upside down, its current account surplus – a wider measure of international flows – is shrinking fast, according to projections from its central bank and finance ministry.
There are signs that this shift could last. Merkel and Finance Minister Olaf Scholz are willing to suspend the debt brake – constitutionally enshrined rules which significantly curb German stimulus borrowing – again next year, three government officials told Reuters.
The conservative leader and the centre-left vice chancellor are also determined to strengthen the European Union at a time when its cohesion has been rocked by Britain’s departure and challenges from the United States and China, the sources said.
After decades of German resistance, Merkel and Scholz are backing an unprecedented 500 billion euros of joint European debt issuance to aid member states worst hit by COVID-19 and tackle growing discrepancies in the bloc.
“Merkel is worried about two things: that a second wave of infections could force authorities to implement another lockdown and that Europe could break apart because of the crisis,” said one of the officials who spoke on condition of anonymity.
After 15 years in power and with her chancellorship coming to a self-determined end with the general election next year, Merkel now has room to act more freely and think more about how history will judge her, a second senior official told Reuters.
“With Germany taking over the rotating EU presidency for six months from July, there was always the plan to breathe more life into the pledge of European solidarity,” the official said.
“The coronavirus crisis accelerated this and underlined the urgency to act even more boldly now,” the official added.
The German central bank expects the pandemic to slash exports by more than 13% in 2020 while imports are only predicted to fall by 7%.
“This together creates downward pressure on the trade surplus and with it the current account surplus,” Bundesbank chief economist Jens Ulbrich told Reuters.
The central bank expects the latter surplus to fall below 5% of economic output this year from above 7% in 2019. This would be the lowest level since 2005 and sharply down from a peak of 8.6% reached in 2015.
“With the recovery of the global economy, the balance will increase again by 2022, but without reaching the levels of previous years,” Ulbrich said.
The European Commission, International Monetary Fund (IMF) and Organization of Economic Co-operation and Development (OECD) all expect the surplus to shrink too, though to a smaller extent.
They are also unsure if the German rebalancing will last beyond the pandemic.
“Whether the effect is temporary will depend in part on the rebound in global demand for capital goods. The Chinese economy is shifting towards a more consumption-led growth model, which will reduce the demand for German exports more permanently,” Andrew Barker, head of the Germany desk at the OECD Economics Department, told Reuters.
Germany’s large stimulus package, financed with record new borrowing of 218.5 billion euros this year, is having a clear effect this year, but the future budget path is not certain.
Nora Hesse, a Berlin-based economic advisor to the European Commission, said German savings were likely to remain high due to its ageing population while public and private sector investment were still subdued.
“That’s why the European Commission continues to recommend Germany increase its investment in the green and digital transformation of its economy, in training and education, research and innovation, as well as in housing,” Hesse said.
Shekhar Aiyar, the IMF’s mission chief for Germany, cautioned that a drop in the current account surplus might be temporary and recommended Berlin continue its growth-oriented fiscal policy beyond the current crisis.
The IMF sees the surplus remaining above 6 percent of GDP in the medium term, supported by growing investment income flows from large net foreign assets, Aiyar said.
As striking as German fiscal efforts to tackle the coronavirus crisis have been, Berlin will remain under pressure from international bodies and its euro zone neighbours to stay the course.
“Germany’s surplus in recent years borders on mercantilism and has been a blight on the world economy,” Harvard University economist Dani Rodrik told Reuters, but he added that Berlin’s fiscal response to the crisis was impressive.
“Especially during the pandemic, Germany should not be a contributor to recession in the rest of the world.”
Source: Reuters (Reporting by Michael Nienaber and Rene Wagner; Editing by Toby Chopra)