Prolonged German downturn could prompt stimulus rethink

Tue Oct 7, 2014 7:06pm EDT
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By Noah Barkin

BERLIN (Reuters) - The last thing the faltering European economy would appear to need right now is a sudden downturn in Germany, hitherto the bloc's pillar of strength.

But a bout of German weakness may be precisely what is required to convince Angela Merkel to loosen the fiscal reins at home and provide Europe with a dose of stimulus that struggling states like France and Italy have long been seeking.

For now, the top economic priority of Merkel's government is to deliver on its promise of a "schwarze Null" - a federal budget that is in the black, or fully balanced - in 2015.

That goal, spelled out in the coalition agreement struck last year between Merkel's conservatives and the center-left Social Democrats (SPD), is described by officials in Berlin as a political "holy grail" - an historic achievement that would carry huge benefits for both ruling partners if reached.

It is largely due to the constraints of this budget target that Merkel has repeatedly rebuffed calls at home and abroad for Berlin to splash out more public money on infrastructure.

But if the German economy, which contracted by 0.2 percent in the second quarter and may flatline in the third, continues to weaken into next year, Merkel could be forced to reverse course and step up public investment, as the European Central Bank (ECB) and International Monetary Fund (IMF) have urged.

"If the only way to achieve the balanced budget goal is to make cuts that would deepen a recession, it will be abandoned and we will see more spending," said one senior German official, who requested anonymity due to the sensitivity of the issue.

Another official close to the chancellor said: "If the German economy weakens substantially, that would be a game changer."   Continued...

General view of the characteristic Frankfurt skyline with its banking towers, January 16, 2012.   REUTERS/Kai Pfaffenbach