German Chancellor Angela Merkel’s deal with the Social Democrats may provide enough of a spur to keep Europe’s biggest economy growing, while failing to provide the boost elsewhere international critics are demanding.
By refusing to increase the country’s debt, Merkel’s third-term coalition will rely on economic expansion to finance the increased infrastructure and pension spending demanded by her junior partners. The introduction of a national minimum wage may also aid consumption.
“All of these policies will boost growth rather than subtract from it, but still don’t go as far as those in Washington would want,” Christian Schulz, a London-based economist at Berenberg Bank, said in an interview today.
Merkel’s Christian Democrat-led bloc and the SPD negotiated amid a backdrop of criticism of the country’s swelling trade surplus from the European Union, U.S. Treasury Department and International Monetary Fund. Their contention is that Germany’s emphasis on its competitive position has constrained domestic spending and demand for imports that could help sustain the euro region’s path out of recession.
German economic growth will accelerate to 1.7 percent next year from 0.5 percent in 2013, outpacing the euro zone’s 1.1 percent expansion, the European Commission forecast on Nov. 5. It predicted the unemployment rate would drop to 5.3 percent next year, the second-lowest in the European Union.
Growth still slowed in the third quarter as domestic demand failed to expand enough to offset stalling exports. Gross domestic product rose 0.3 percent, less than half the pace of the previous three months, as net trade damped output.
The day before the GDP report on Nov. 14, the EU said it would probe Germany’s current-acount surplus, which has exceeded the bloc’s 6 percent threshold every year since 2007 and may put upward pressure on the euro.
With the SPD calling for steps to narrow the wealth gap as a condition to joining Merkel in government, their compromise blueprint pledged additional domestic spending of at least 20 billion euros ($27 billion).
The minimum wage, to be introduced in 2015, was set at 8.50 euros an hour. Pensions will benefit from an injection of 2 billion euros and infrastructure by 5 billion euros. It includes a commitment to pursue a structurally balanced budget from next year and to have no new deficit spending from 2015.
“On balance, its good for Germany and means growth will be stronger next year,” Jacques Cailloux, chief European economist at Nomura International Plc in London, said in an interview. “It will be the best performer among the core, but the leakage in terms of positive spillover might be limited for the rest of the region. But it’s better than nothing.”
France, the second-biggest European economy, called the minimum wage a “very positive signal” as some economists and officials expressed concern it was a sign Merkel was putting Germany’s competitive edge at risk.
“While these measures are unlikely to derail the current recovery, it will probably put a dampener on the medium to longer term growth prospects of the German economy,” Andreas Rees, chief German Economist at UniCredit MIB in Munich, wrote in a note today.