/Don’t Count on Merkel’s Standoff Leading to German Stimulus Soon

Don’t Count on Merkel’s Standoff Leading to German Stimulus Soon


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Angela Merkel’s coalition partner is turning leftwards, but that doesn’t mean Germany’s chancellor is poised to give into calls for a major fiscal stimulus.

While the shift at the helm of the Social Democrats will intensify calls for more spending, tight purse strings remain a red line for her own CDU party. Any more stimulus is likely to be incremental for now to avoid piling on debt, since a move to open the fiscal floodgates might lead Merkel’s side to abandon the coalition.

Germany has had a budget surplus for the past years

The country has faced increasing calls from the European Central Bank and International Monetary Fund this year to use the space it built up with its “black zero” balanced-budget policy to shore up Europe’s biggest economy. So far, Merkel and her SPD Finance Minister, Olaf Scholz, have said weak growth doesn’t justify that. A lot might still need to happen before that position shifts.

“The potential for a bigger fiscal stimulus is limited,” said Florian Hense, an economist at Berenberg Bank in London. “It’ll only change if there are new elections.”

With government critics Norbert Walter-Borjans and Saskia Esken now leading the SPD — having defeated Scholz — the focus now moves to a three-day party convention starting on Friday. The party’s new guardians are already seeking policy changes to the coalition agreement, a demand rejected outright by Annegret Kramp-Karrenbauer, who leads the CDU.

‘Open to Talks’

Merkel’s government spokesman elaborated on that stance on Monday, saying that she is open to discussions after the upcoming convention but rules out a renegotiation of the accord.

“That’s the way it should be in a coalition,” Steffen Seibert told reporters. “Open to cooperation and open to talks.”

How far the SPD tries to push Merkel to unleash a major spending spree will be crucial. Such a move would risk the already fragile unity of her CDU alliance with its Bavarian sister party, the CSU, just as Kramp-Karrenbauer is already struggling with internal dissent.

Any denouement is likely to be preceded by further talks and wrangling, with maybe weeks of stalemate in prospect, not least with the Christmas period approaching. The choice facing Merkel’s party would be to succumb to SPD demands, attempt to govern in a minority alone or with alternative support, or else seek new elections.

Debating Dogma

That outcome in particular could eventually lead to a spending boost — but only after the prospect of further protracted coalition negotiations, and a further deterioration in the economy.

“This dogma of the black zero may get watered down at some point,” Christoph Rieger, head of rates and credit research at Commerzbank AG, told Bloomberg Television. “We maybe are heading for new elections or a minority government, at least of Merkel. Prospects of the Greens at some point entering the government clearly mean more spending, perhaps even together with a left party.”

Fiscal Stimulus

ECB wants countries with budget space, such as Germany, to spend more

Source: European Commission November forecast

The ECB would dearly love Germany to loosen its fiscal purse strings and help shore up growth in the region at a time when its own ammunition to do so is largely exhausted. The IMF also recommended budget stimulus in its most recent global forecasting round last month, calling for “public investment in physical and human capital or reducing the labor tax wedge.”

The German government has been increasing spending, but mainly by relative stealth, including a package designed to combat climate change. But the black zero remains an article of faith for Merkel’s party, having given ground to the SPD in many other areas to ensure it can keep governing.

Formally, the prospect of a major spending round has tended to hinge on the government’s judgment that only a crisis would call for that. Instead, the economy has some tentative signs of stabilization, having just escaped a recession. Germany’s Bundesbank has also declared major stimulus unnecessary.

“In the end, we probably will land in a political gridlock,” said Oliver Rakau, an economist at Oxford Economics in London. “We’ll see a lot of political noise in the next few months but the baseline is that we won’t see a change in government policy.”

— With assistance by Nejra Cehic, and Zoe Schneeweiss

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