Jens Weidmann hit back at criticism of Germany’s current-account and budget surpluses by International Monetary Fund managing director Christine Lagarde, saying that increasing public spending to tackle the issue would be the wrong way to go.
The Bundesbank president kicked off a joint conference by the two institutions by insisting that Europe’s largest economy doesn’t need more expenditure, though he agreed that it should be improved. Public outlays should shift away from consumption and toward targeted investment, he said.
“Raising public spending in order to reduce Germany’s current account surplus would likely be a futile undertaking,” he said. “This does not mean that there is no need for action on fiscal policy. Action is warranted to counteract the demographic drag on growth — but action not with regard to the overall stance, but with regard to how the money is spent.”
Lagarde, who was also at yesterday’s event in Frankfurt, had written a blog post only a few hours earlier saying that the government should invest its budget surplus to boost long-term growth. She said that would help with a current-account gap that is too large, even considering the need to save for retirement in an ageing society.
“Boosting investment in the German economy and reducing the need to save for retirement by encouraging older workers to remain in the labour force can lower the surplus. We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension.”
Germany’s current account has been a lightning rod for criticism, including from US President Donald Trump’s administration, which considers it a sign of trade distortion. The gap has grown amid the fastest economic expansion since 2011 on the back of record-low unemployment, strong global trade and the European Central Bank’s expansionary monetary policy.
The current-account surplus over the 12 months through November totalled €262bn ($320bn). The budget excess was 1.2% of gross domestic product last year, the biggest since reunification in 1990 and the fourth in row.
Chancellor Angela Merkel’s Christian Democratic-led bloc and the Social Democrats agreed to continue with a policy of balanced budget in a preliminary accord to start coalition talks reached last week.
The Frankfurt conference, which lists ECB Executive Board member Benoit Coeure and former Italian Prime Minister Mario Monti among speakers, will also examine why growth in German wages remains so weak.
Weidmann said migration from other European Union member states is partially responsible for muted wage pressures. Labour unions are also playing a part by insisting on reduced working hours and more training instead of higher pay, he said.
“But when it comes to modest wage growth in the face of tight labour-market conditions, Germany is by no means unique,” Weidmann said, calling it a widespread phenomenon in countries including the US, the UK and Japan.
“This suggests that the factors responsible for holding back wage growth are not only idiosyncratic, but at least partly international as well.”
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