Germany Sees Global Risk Shift to Emerging Economies

Germany’s top finance officials said risks to global growth are shifting away from Europe and toward emerging economies, while they expressed confidence that U.S. policy makers will overcome their divide over the budget.

The euro region has left its recession behind and is no longer at the center of attention of crisis-fixing efforts, Bundesbank President Jens Weidmann told reporters in Washington yesterday. Finance Minister Wolfgang Schaeuble, after holding talks with his U.S. counterpart Jacob J. Lew, said he hopes that the budget standoff in the U.S. will be solved in coming days.

“We’re no longer the main worry for the world economy, at least not in the short run,” Schaeuble said after the annual meetings of the International Monetary Fund and the World Bank. “Risks have shifted somewhat in the direction of emerging countries, where growth has slowed.”

Emerging market bonds and currencies fell earlier this year as U.S. Federal Reserve officials signaled they may soon start to taper their $85 billion asset-purchase program. The IMF’s steering committee yesterday said volatility in capital flows and financial markets has created “new challenges” for some emerging market economies.

“There’s been a broad consensus here in deliberations that we have to look more closely at the interests and problems of the emerging countries because at the moment they represent a bigger potential risk,” Schaeuble said.

The IMF cut its global growth forecast for this year and next last week and predicted developing economies will grow 4.5 percent in 2013, compared with a July prediction of 5 percent. Emerging-market stocks fell the most in a week Oct. 11.

Banking Union

Weidmann said the interest in Europe during the meetings centered mostly on institutional changes, especially progress on building the region’s banking union, the conduct of asset quality checks and stress tests for lenders, as well as the removal of “legacy burdens” in the banking sector that has to be completed before supervision by the European Central Bank can start.

Schaeuble on Oct. 11 repeated the German government’s stance that the European Commission’s bank resolution proposal is on shaky legal ground and could endanger national control of budgets. European Union finance ministers will have another chance to discuss the plan next week in Luxembourg.

“We will continue work on the Single Resolution Mechanism,” Schaeuble told reporters Oct. 11, noting that IMF proposals for institutional changes in Europe sometimes lack knowledge of the union’s treaty foundations. “We need an agency solution on the basis of Article 114, with cooperation between national institutions. There won’t be a European backstop, but national backstops.”

Next Government

Schaeuble has said the next German government, probably led by Chancellor Angela Merkel for a third time, won’t stray from the path of reforms in the EU, suggesting there’ll be continuity in Germany’s Europe policies irrespective of whether Merkel will rule with the Social Democrats or the Greens.

Merkel’s bloc will meet SPD negotiators on Oct. 14 and will convene again with the Greens on Oct. 15, CDU Secretary General Hermann Groehe said. Schaeuble said yesterday the new government could be ready by mid-November, which contrasts with concerns among some negotiators that talks could drag on until the start of 2014.

In the U.S., Senate Republicans yesterday blocked Democrats’ plan to suspend the debt ceiling through 2014. Talks between House Republicans and President Barack Obama faltered. Senate Democrats rejected a proposal from Republican Senator Susan Collins of Maine that had gained momentum in the past day.

“Everybody is aware of the dimension of this problem and we’re confident that both political sides will be able as in the past to agree on a solution,” Weidmann said of the risks of U.S. default. Schaeuble said “there must” be an agreement because there’s no alternative.

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