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Germany’s Bundesbank chief warned Berlin that Europe’s biggest economy faces a “complex” and “weak” outlook and called on Berlin to ease strict spending controls.
Germans are set to go to the polls in February, with Europe’s worst post-pandemic economic downturn fueling widespread voter dissatisfaction with Chancellor Olaf Scholz’s ruling coalition.
Bundesbank President Joachim Nagel told the Financial Times that the next government will seek to address the long-term economic risks facing Germany by ensuring that the city of Berlin accounts for more than 0.35% of gross domestic product (GDP) in any financial year. He said the so-called debt brake, which prohibits borrowing, needs to be reformed.
Nagel said expanding fiscal space to address structural threats, such as increasing defense spending and modernizing the nation’s infrastructure, would be a “very prudent approach.”
The Bundesbank chief’s comments are the most outspoken yet on how a future chancellor should deal with Germany’s limited fiscal space.
Nagel said the current outlook is “more complex” than it was at the beginning of the 21st century. At the time, unemployment was much worse, but “there was no geopolitical division and global trade was growing strongly.”
Germany’s economy has seen virtually no real growth since the second half of 2021, with key manufacturing industries under pressure from high energy costs and declining competitiveness.
These challenges could worsen if Donald Trump returns to the White House, with the president-elect threatening to impose blanket tariffs of up to 20% on all imports from the United States.
The Bundesbank will not officially update its growth forecast until later this month, but Nagel said 2025 is likely to be “another year of low growth” for the German economy, with the central bank forecasting around 0.0%. He said it was likely to be 4%.
A central bank official said growth would likely slow further if President Trump imposed blanket tariffs on the scale he promised.
“Significant tariff increases on top of current forecasts could result in a more prolonged economic stagnation in general,” he said, adding, “Even the labor market could show more pronounced weakness.” It’s sexual,” he added.
Germany’s seasonally adjusted unemployment rate, as defined by the Federal Employment Agency, remains at a relatively low level of 6.1%. However, this level partly reflects the creation of large numbers of low-wage jobs in the service sector at the expense of high-wage manufacturing jobs.
Nagel said he remained confident that Germany could overcome any crisis, saying: “Past experience shows that when Germany feels pain, it changes.”
He cited the debate over reforming the constitutional debt brake as an example of how Germany could respond.
“You could also think about differentiating between consumption spending and investment in order to have more headroom on the structural investment side,” he said, adding that Germany’s debt-to-GDP ratio has fallen significantly, reaching the EU-set 60% threshold. He pointed out that they are approaching the same level. Rules for the Stability and Growth Pact.
The inability to balance spending needs with the limited fiscal space created by the debt brake was blamed last month for the collapse of Scholz’s ill-fated Social Democratic Party, Green Party and Liberal Democratic Party coalition. It became.
In the run-up to a snap general election that is likely to be held in February, a review of strict borrowing limits is a central topic of discussion. Friedrich Merz of the Christian Democratic Union, the opposition leader most likely to secure the chancellorship, has signaled he may be open to limited reforms to the debt brake.
For the first time, Germany’s Bundesbank has floated the idea of reforming the debt brake in 2022.
Nagel said in March that Germany could increase its budget deficit “slightly” over a “certain period” without endangering stability.
Nagel acknowledged that the debt brake agreed in 2009 was a “very helpful tool” after public debt rose dramatically in the aftermath of the global financial crisis. During the euro crisis, this suspension period also sent the message that governments must get their debt and deficit situation under control.
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Germany’s Bundesbank president, who has voting power on the European Central Bank’s board of directors, declined to take a position on the next interest rate decision, scheduled for Dec. 12.
But he said the ECB’s 2% inflation target was “on the horizon” and should be achieved “by the middle of next year at the latest.”
Eurozone inflation was 2.3% in November. The ECB’s latest forecasts suggest rate setters will reach their target in 2025.
He said he would “overemphasize” the risk that the ECB would fall below its 2% target because core inflation – a measure considered a better indicator of the persistence of price pressures – “remains very sticky”. He emphasized that he had no intention of doing so.
Data visualization by Steven Bernard in London
