German spending would do little for global growth: Bundesbank
August 16 2016 01:43 AM
GERMAN
The Bundesbank headquarters building in Frankfurt. Increased public spending would boost German domestic demand, and thereby trade with “some small and medium-size economies in the surroundings of Germany and in central Europe”; but the effect would be “weak” for the eurozone’s biggest economies like France, Italy and Spain, says the Bundesbank.

AFP, Reuters/Berlin

A public stimulus programme in Germany would contribute little to lifting global growth, the Bundesbank said yesterday, shrugging off calls from eurozone partners for Berlin to increase its spending.
“It appears that a programme of public spending in Germany would not be the most appropriate tool to help give a strong stimulus to the international economy,” the central bank said following a study into the issue.
Increased public spending would boost German domestic demand, and thereby trade with “some small and medium-size economies in the surroundings of Germany and in central Europe”.
But the effect would be “weak” for the eurozone’s biggest economies like France, Italy and Spain, said the Bundesbank, adding that it would also have little impact on Portugal and Greece.
The bank grounded its arguments in a study that simulated an increase in German public investments by up to 1.0% of gross domestic product over two years.
But the study concluded that “German economic policy cannot resolve the external economic inequality of another country”.
The bank has always been sceptical about recurrent calls from the International Monetary Fund as well as European partners like France for Berlin to increase its public spending.
Such calls have grown louder in recent years as Europe’s biggest economy has seen healthy growth — with the Bundesbank expecting GDP to expand by 1.7% this year, while the eurozone is struggling with low inflation and tepid growth.
Berlin has also come in for criticism for profiting from European demand through its popular “Made in Germany” exports while doing little to contribute to lifting the single currency area’s growth.
Meanwhile, Germany should consider raising the retirement age to 69 by 2060, from around 65 currently, or risk struggling to honour its pension commitments, the central bank said.
The state pension system is in good financial health currently but will come under pressure in coming decades as baby-boomers retire and there are fewer younger workers to replace them, the Bundesbank said in a report.
The retirement age for Germans is scheduled to rise gradually to 67 by 2030.
The Bundesbank estimates this increase will not be enough to allow the German government to keep state pensions at the level it targets — at least 43% of the average income, from the 2050s due to people living longer.
To avoid raising contributions too far or letting pension levels sink, the government should consider increasing the retirement age to 69 by 2060, the central bank said.
“Further changes are unavoidable to secure the financial sustainability (of the state pension system),” the Bundesbank said in its monthly report.
The proposal was unlikely to prove politically palatable before the 2017 election.
German government spokesman Steffen Seibert said: “This German government stands by retirement at 67.
Retirement at 67 is a sensible and necessary measure given the demographic development in Germany.
That’s why we will implement it as we agreed — step by step.”
Finance Minister Wolfgang Schaeuble was criticised by his Social Democrat coalition partners in April when he proposed linking the retirement age to life expectancy.
The Bundesbank’s calculations show an increased retirement age would allow the government to cope with lower-than-expected return on the money invested by the pension system — an implicit reference to the European Central Bank’s ultra-low interest rates.
The government expects a 4% annual return on investment, which compares to a yield of just 0.2% on its 20-year bond.
Britain’s vote to leave the European Union should have limited immediate economic impact on Germany, the country’s central bank said, noting the mood among entrepreneurs remained positive.
The Bundesbank expects the German economy to have continued to expand over the summer, underpinned by exports, industrial production, construction and consumer spending.
“Against the background of an intense public debate about the economic effects of the announced exit of the United Kingdom from the EU, German companies’ positive expectations have so far only been modestly dampened,” the Bundesbank said in its monthly report.
“This supports the view that the economic consequences of the Brexit vote for Germany will be limited, at least in the short term.”
Germany’s gross domestic product grew by 0.4% in the three months to June, data showed last week.
While this was less than in the first quarter of the year, it still put Germany well ahead of its peers and of analyst expectations.



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