A new article from ING argues that Germany will find its hand forced soon around fiscal stimulus.
The article, A Song for Europe, was posted to the firm’s site a few days ago, and says that there are few signs of optimism across the continent. It referred to the recent collapse of Germany’s government, which has been unable to agree or pass a budget for next year due to the constitutional inclusion of a ‘debt brake’, or schuldenbremse.
Smith wrote: “Of course, Germany’s snap February election couldn’t come at a worse time politically. And given public debt levels across Europe, Germany is realistically the only country in a position to go big on fiscal policy. Here, Carsten senses a subtle but important shift in views on the infamous debt brake, which heavily restricts the annual deficit. If that constraint is adjusted, then he sees scope for extra fiscal stimulus worth 1-2% of GDP over the coming years. That would be big news for Europe as a whole.”
Even that came with a caveat.
See also: EIB assesses Covid-19 impact on investment sectors
Wrote Smith: “But even if it happens, it’s a story for 2025 or, more realistically, 2026. For now, the mood at the ECB still reflects ever-increasing concern about growth. Keep an eye on next week’s purchasing managers indices (PMIs). A weak batch in October was ultimately what locked in that 25bp rate cut last month. And these next numbers will decide whether the ECB doubles down on a 50bp cut in December.”
Elsewhere this week, ING’s global head of macro Carsten Brzeski said that Germany will have to implement some kind of fiscal stimulus, despite the ‘debt brake’ that has caused in recent weeks the collapse of Germany’s ruling coalition.
Brzeski wrote: “Currently, the investment gap in Germany is estimated to be some €600bn, or some 15% of GDP. Also, add to this another €30bn per year, which would be needed to bring German defence spending to the 2% of GDP target. The closing of such a gap will never be achieved by only cutting expenditures.”
He added: “Consequently, any serious effort to fundamentally reform and improve the German economy will have to come with fiscal stimulus. Stimulus that would also benefit the debt-to-GDP ratio as in the German debate very often the denominator is overlooked. Debt ratios can also come down when GDP growth picks up.”
