No. But does it matter? By contrast, a recession would lead to at least a passive loosening of fiscal policyMore…
Recent production and export data from Germany came in worse than expected. Despite some rebound that can be expected for September and a more robust service sector, a decline in GDP in Q3 cannot be excluded. It would be the second in a row – in other words: Germany would be in recession.
The bad numbers intensified the inner-German debate 1) about the weaknesses of the German “business model” too dependent on foreign demand and 2) about the Grand coalition government resting on its laurels and not doing enough to support growth.
Has QE become more likely?
Large scale purchases of government bonds will become more likely if Europe’s former growth engine sputters because the output gap widens which increases disinflationary/deflationary pressures. That would strengthen the case of the doves in the ECB. So in that sense, a recession in Germany could move the ECB closer to QE. And the doves only need a majority in the Governing Council, not unanimity.
For two reasons, the German Government is unlikely to openly support the ECB’s “whatever it takes”-approach and QE. First of all, Merkel, Schäuble and Co. don’t believe that monetary policy can solve real problems and create sustainable growth. And they are convinced that more ECB action will mean (even) less reform effort. That is the economic aspect. Secondly on the political side, supporting the ECB would play into the cards of the Euro-critic party Alternative für Deutschland (Afd) that did well in recent elections and does well in current polls. “Whatever it takes” is unpopular not only with most German economists but also with a majority of people on the street.
In private, the government might still want the ECB to go ahead. After all, the ECB is an independent body and a weaker euro helps to foster foreign demand also for German goods. And if it brings some growth, calls on Germany to loosen fiscal policy may abate.
What about fiscal policy? In my view, a recession in Germany would lead to a passive loosening of fiscal policy, but probably not to a huge fiscal boost. The government would let the automatic stabilizers work (through lower tax and social security receipts plus higher expenditure) and might consider a few limited stimulation measures on top of that. Moreover, Germany could not credibly deny a passive loosing of fiscal policy to France and Italy either.
A sizable fiscal programme of say 2% of GDP in Germany seems very unlikely because the balanced budget mantra continues to be strong. Critics have a good point in saying that while it may be wise not to put too much public debt on the shoulders of the next generation, it is certainly unwise to pass on rotten bridges and school buildings to them.
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