German finance policy

The Anchor Starts to Drag

2017 IMF Spring Meetings
Who's next, Wolfie? IMF boss Christine Lagarde with Wolfgang Schäuble. Source: DPA

Wolfgang Schäuble, Germany’s notoriously frugal finance minister, has a job on his hands at the autumn gatherings of the International Monetary Fund and World Bank in Washington this weekend. While there will be plenty of back-slapping from peers and top officials as he attends his final meetings as Germany’s purse-strings holder, Mr. Schäuble must also try to convince them that the ship is steady. Because many financial leaders are wondering who and what will come next. Suddenly there’s a question mark over Germany, trusted as an anchor of stability throughout the financial crisis and the euro crisis.

Chancellor Angela Merkel has been weakened by the steep decline in support for her conservatives in last month’s election and now has to form what could prove to be a shaky three-way coalition with the Greens and the pro-business Free Democratic Party (FDP). With their latest figures showing healthy growth in the world economy, nervous IMF and World Bank delegates are already starting to ask difficult questions of one of its key anchors: How stable will Germany’s new government be? Will Mr. Schäuble be succeeded by another hardliner? Can Europe’s leading power still be relied on?

It’s become evident that forming a coalition is going to be tough for Ms. Merkel’s Christian Democrats. She was even forced into making a concession to get her Bavarian conservative allies, the Christian Social Union, on side to pursue coalition talks with the Greens and Free Democrats. After previously being steadfast in refusal, she agreed last weekend to put a cap, nominally 200,000, on the number of refugees Germany is prepared to let in per year. Officials insisted that no asylum-seeker would be turned away, but the mere mention of a number represented a climbdown and underscored that Ms. Merkel’s power is waning. “Merkel is weakened because she will have to make more compromises than before,” said David Zahn, head of European bonds at investment firm Franklin Templeton.

Financial investors are worried that the presence of the Free Democrats in the government might lessen Ms. Merkel’s leeway in negotiations on reform of the euro zone. FDP leaders have said they oppose a plan by French President Emmanuel Macron to create a separate budget and finance minister for the 19-nation single currency bloc.

“Action is required now because vulnerabilities are building. This could put growth at risk in the future.”

Tobias Adrian, IMF

Martin Lück, head of capital markets strategy for Germany, Austria and eastern Europe at fund management group BlackRock, said it would be a mistake if Germany’s new finance minister were to block Mr. Macron’s plans just for the sake of preaching free market values. “The probable inclusion of the FDP in government could lead to shifts in German policy toward the stabilization of the euro, especially if the party gets the post of finance minister,” said Mr. Lück.

He sees a risk that the euro crisis could return with the FDP in government. During the election campaign, party leader Christian Lindner said Greece, repeatedly bailed out by its European partners in a bid to keep the currency bloc intact, should leave the euro. The reintroduction of the former Greek currency, the drachma, would be a boon for the country, he argued.

The party also wants to give homebuyers tax breaks to make it cheaper to purchase property. This is a contentious area, and Mr. Schäuble’s successor will need to address the overheating real estate market. The European Central Bank has warned that Germany is at risk of a bubble as property prices continue to soar. It’s concerned that loan defaults could mount because house prices may fall.

In Washington, Mr. Schäuble won’t just be asked about his possible successor. He’ll also likely be confronted like so many times before with calls for Germany to hike government spending after almost four years of balanced budgets. In an indirect swipe at Germany, IMF Chief Economist Maurice Obstfeld said this week that governments with fiscal room for maneuver should increase spending on infrastructure and education. His remark echoed criticism by Anglo Saxon economists that Germany isn’t investing enough of its surging tax revenues. Mr. Obstfeld said such investments could help redress global imbalances caused by austerity programs in other nations that were hitting global demand.

But overall, the IMF had positive news. In a report ahead of its autumn meeting, it predicted that the global world economy will grow 3.6 percent in 2017, up from 3.2 percent in 2016, and will likely grow 3.7 per cent in 2018. However, the fund warned that the buoyant growth could lead to risks being overlooked. “This is no time for complacency,” said the IMF’s Tobias Adrian at the release of its Global Financial Stability Report. “Action is required now because vulnerabilities are building. This could put growth at risk in the future.”

The report called on policymakers and regulators to tackle problems left over from the financial crisis, such as bad debt and weak bank earnings, and to require banks and insurers to strengthen their balance sheets. With Germany’s banks experiencing a tough time, it will be yet another item on Mr. Schäuble’s successor’s to-do list.

 

Michael Maisch is the deputy chief of Handelsblatt’s finance desk. Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. Other Handelsblatt journalists also contributed to this article. To contact the authors: maisch@handelsblatt.com, wiebe@handelsblatt.com

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