Fiscal fillips

Berlin should brace for economic downturn, Bundesbank chief warns

I've got news for you, Angie. Source: AFP

Once a year, Germany’s cabinet is joined by an important visitor from Frankfurt. The day the national budget is approved, the president of the Bundesbank gets to sit in on the meeting and speak his mind about economic policy.

It can make for uncomfortable listening. Last year Jens Weidmann, the central bank’s outspoken boss, vehemently criticized ministers’ plans to cut taxes, a key plank in the governing coalition’s election platform.

On Friday, Mr. Weidmann was back in Berlin to oversee the launch of Germany’s 2019 budget. Sure enough, he gave Angela Merkel’s government a piece of his mind, warning that the country’s prolonged economic boom was in serious danger of sputtering. First-quarter economic figures, which showed declines in exports and new industrial orders, clearly pointed to slower German growth, he said, adding that political risks were increasing fast, government sources told Handelsblatt.

On the basis of that data, the Bundesbank last month cut its forecast for this year’s GDP growth to 2.0 percent from 2.5 percent. Now, Mr. Weidmann has told ministers that the slowdown could be worse than expected. In particular, the Trump administration’s protectionist policies could rattle Germany’s export-driven economy. Brexit and other geopolitical risks were also a factor, he said.

Fix your roof while the sun shines

This meant Germany’s government had to prepare for tough times, especially since the European Central Bank would probably not be in a position to soften the blow, Mr. Weidmann said. The ECB, comforted by a recent pick-up in inflation, plans to halt its bond-buying stimulus program at the end of this year, leaving it with one less weapon to combat a recession. Interest rates remain at an all-time low, making it impossible to cut rates to boost demand.

So the task of reviving the economy would fall to the government’s fiscal policies, Mr. Weidmann reportedly told ministers. But with many euro-zone countries still laden with mountains of debt, there may be little scope to increase spending without panicking the financial markets.

Mr. Weidmann, who’s seen as a prime candidate to succeed ECB president Mario Draghi next year, urged countries to get their financial house in order now, in relatively good economic times. He noted that the International Monetary Fund had made similar calls in recent months.

But German business seems to be in better shape to ride out an economic storm than a decade ago, when the global financial crisis unfolded. The German Savings Banks Association (DSGV) said data gathered from its 300,000 business clients suggest that companies have lowered their debt levels to 26.7 percent from 32.6 percent of their overall assets, and have increased cash holdings and equity ratios.

Business profitability has also increased across Germany, with average profit margins at 5.8 percent – the highest level ever. The DSGV data covers approximately 60 percent of all German business, measured by turnover.

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Brían Hanrahan adapted this article into English for Handelsblatt Global. To contact the authors:,

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