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Good Times Are Over Unless Europe Acts

min zhu _ bloomberg
Min Zhu wants more oomph from Germany when it comes to growth.
  • Why it matters

    Why it matters

    The world seems to be facing a period of low potential growth. The IMF believes Germany is one of the few wealthy countries with the fiscal space to address this problem now.

  • Facts


    • Min Zhu, a former deputy of the Chinese central bank, became deputy chief of the IMF in 2011.
    • Germany should spend an additional 0.5 percent of GDP on public investment, Mr. Zhu said.
    • The IMF this week warned the world economy may never again see the kind of growth it did before the global financial crisis.
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Min Zhu may exert a relaxed air when he speaks, but his message to Germany is clear. The International Monetary Fund’s deputy chief is calling on the leaders of Europe’s largest economy to invest more money and help pull the whole continent out of stagnation.

What will it take? In an exclusive interview with Handelsblatt, Mr. Zhu estimated Germany’s government should spend an additional 0.5 percent of its annual economic output over the next few years. The money should flow primarily into public infrastructure, where there is still plenty that needs to be fixed, and which could also encourage more spending by Germany’s companies.

“We see room for the German government to increase public investment,” said Mr. Zhu, a former deputy head of China’s central bank. “If you raise domestic public investment, that would be good not only for Germany but for the whole of Europe and the world.”

Mr. Zhu’s call follows stark warnings from the IMF this week about the state of the global economy. The Washington-based institution is hosting a gathering of finance ministers and central bankers from around the world.

“We see room for the German government to increase public investment.”

Min Zhu, Deputy chief, International Monetary Fund

The IMF believes Germany’s help is needed to help revive Europe. On Thursday, IMF chief Christine Lagarde warned there is a “serious risk” that the euro zone could slip back into recession. She also warned that the global economy may never return to the kind of growth levels that were seen before the 2008 financial crisis.

The IMF has argued that Germany is one of the few major countries in the world with the fiscal space to stimulate growth. But German Finance Minister Wolfgang Schäuble, who is determined to get by without issuing any new debt next year, has rejected this pressure, arguing that a little more German spending will do little to solve Europe’s problems.

Mr. Zhu’s call for additional spending would require Mr. Schäuble to accept running a budget deficit of 0.5 percent of economic output, which would still be in line with the 3 percent level deficit limit under the European Union budgetary rules.




Even this is a cautious proposal. Some economic groups have pushed for much greater stimulus. The German Institute for Economic Research has said that Germany faces an “investment gap” of 3 percent of GDP each year – about €75 billion – that needs to be addressed by a combination of government spending and investment by the private sector.

In a series of reports released this week, the IMF warned the dangers of speculation in financial markets around the world have also increased as central banks have flooded the markets with easy money. By contrast, the real economy has failed to keep up pace. Mr. Min said this remains one of the key problems facing Europe in particular.

“We support the ECB to do further easing.”

Min Zhu, Deputy chief, IMF

“We see divergence between the real economy and the financial sector today,” Mr. Zhu said. “This is not good for growth. And it’s not good for the stability of the financial system.”

That doesn’t mean that loose monetary policy is necessarily a bad thing. Mr. Zhu said monetary policy has “played a role” in reviving the global economy after the 2008 financial crisis, and he argued the European Central Bank in particular should consider a “quantitative easing” program, a controversial measure that would see it buy up government bonds in order to ease monetary policy further. He said this should happen even as the United States, which has is “growing strongly,” needs to start thinking about raising interest rates and cutting back on central bank aid for the economy.

But Mr. Zhu stressed that the 18 countries that make up the euro currency need more than just easy central bank money. Policymakers need to ensure there is more investment, both by companies and by the government, while central banks need to ensure the money they provide to banks is actually passed on to the businesses that need loans.

“We support the ECB to do further easing, because we see there’s a need” to stimulate growth, Mr. Zhu said. But, he added: “that’s not enough. You need other policies to support and guide the private sector to invest… there’s a lot of things government can do to support.”

The warning comes as the German economy slowed sharply over the spring and summer months of this year, with many now fearing a short recession could be a possibility. The weakness in Europe’s largest economy is also preventing a stronger recovery in the wider euro zone.

The IMF this week forecast the euro zone will grow at just 0.8 percent this year. Germany by contrast is still expected to grow at 1.3 percent. Mr. Zhu said that while Germany’s short-term growth picture may still be relatively good, the country has to take more steps to confront an ageing population, as well as encourage its companies to come off the sidelines and spend more money within Germany.

“There’s room for the German government to focus its policy on raising potential growth domestically,” Mr. Zhu said. He was pushing not just for more infrastructure spending from the government, but additional labor market reforms that could encourage its workers to become more mobile.

The lack of investment in the economy is not just a problem for Germany and Europe. Mr. Zhu warned that the drop in productivity is a “global phenomenon.” Economies around the world are facing lower potential growth rates and lower investment levels. Trade around the world has also weakened – average growth in trade is about half the rate it was before the crisis, Mr. Min noted.

“There is something fundamental here. These are things we are still trying to understand,” Mr. Zhu said.

With the world becoming more interconnected, the slowdown that has been seen in emerging economies like China is also having a major effect on Germany and the rest of the industrialized world.

Mr. Zhu said some of the weakness seen in developing countries recently is “cyclical,” the result of growth that was likely above potential in the past few years, but he said this doesn’t explain everything. The decline in investment, productivity and capital inflows into emerging economies is something that still has to be explained – and should be seen as a problem for the developed world to address, too.

“They’re half the world now,” Mr. Zhu said of developing nations. “So when they adjust, they will have a negative impact on advanced economies as well …the world is much more interconnected.”


Moritz Koch is Handelsblatt’s Washington correspondent and Tosten Riecke leads the opinion section. Christopher Cermak spent six years covering the IMF in Washington and is now an editor with the Handelsblatt Global Edition in Berlin. To contact the authors:;;

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