Merkel Eyes Measures to Ward Off Looming German Recession

Chancellor Angela Merkel’s government is flirting with measures to stimulate growth, reviewing its options amid evidence that Europe’s largest economy risks plunging into recession.

Among plans being discussed is lowering the mandatory pension contribution by 0.6 percentage point, which would funnel 6 billion euros ($7.6 billion) into the economy, said Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democratic Union in the lower house.

“There is some leeway for measures to help growth,” Fuchs said in a telephone interview.

Germany’s economy is losing steam as sluggish growth in the euro area and political tension with Russia weigh on demand. With next year’s target to balance the budget looming, Merkel’s coalition has resisted calls to boost spending to foster growth.

“The government has been very reluctant, very often just pointing to an accountant’s point of view, saying everything is fine and we have our debt brake coming up and we can’t use this for more investment,” said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. “This position is clearly changing now and the economic data is pushing the government to change.”

German industrial production fell more than economists forecast in August, down a seasonally adjusted 4 percent from July, the Economy Ministry said yesterday. That was the steepest decline since January 2009, when the euro area was sliding into its debt crisis.

Downward Trend

The drop adds to a broader picture of Germany’s $3.6 trillion economy grinding to a halt. Factory orders slid 5.7 percent in August -- also the most since 2009 -- as manufacturing shrank in September. New orders fell at the fastest pace since 2012, a purchasing managers survey showed.

Business confidence has also taken a hit, with the Ifo research institute showing it plummeting to the lowest level in almost a year and a half. Unemployment rose for a second month in September. The downward trend in economic data follows a 0.2 percent decline in gross domestic product in the second quarter.

“Things are not looking good for the German economy and they have not been looking good for some time,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said in an interview. “There’s a strong case that this is the time to raise general investment, including public investment in Germany.”

Earlier Stimulus

In a meeting late yesterday in Berlin, Merkel’s coalition partners discussed easing the flow of private investment, expanding the country’s digital network and shifting to renewable energy, the government said in a statement.

The German leader hasn’t been averse to stimulus in the past. In the midst of the global financial crisis in 2009, Merkel’s first government pushed through a stimulus package of 115 billion euros, a cash-for-clunkers program that was widely copied and assistance for a program that kept workers on companies’ payrolls while putting in fewer hours until the economy rebounded.

This time around, Merkel’s government has bridled at international pressure, including from the International Monetary Fund and the Organization of Economic Cooperation and Development, to bolster domestic demand. While her coalition has agreed to invest 5 billion euros more in infrastructure, Finance Minister Wolfgang Schaeuble has said that his target of balancing the budget next year isn’t up for debate.

The IMF, which cut its 2014 growth outlook for Germany to 1.4 percent from 1.9 percent yesterday, said the country can afford funding “much-needed public investment.”

Deficit Dogma

“My sincere conviction is that sustainable finances are essential for a good investment climate,” Schaeuble said at a conference this week in Berlin. “Doubts about our fiscal policy would harm us much more than any short term growth stimulus program.”

Among those who disagree are Merkel’s own coalition partner, the Social Democrats. Lothar Binding, an SPD lawmaker who is the caucus’s finance expert, said more needed to be done on infrastructure spending.

“That can only be possible if you release yourself from the dogma on deficits,” Binding said in an interview.

In a sign the government is bracing for a slump, officials are preparing legislation to extend benefits for shortened working hours for ailing businesses through next year, the Rheinische Post reported today, citing unidentified officials.

While Germany has promoted the elixir of tighter budgets throughout Europe’s debt crisis -- incurring protests of those who support spending more -- an economic slump at home could push the debate toward stimulus, Brzeski said in an interview.

“It makes it easier to discuss more investment but it also makes it more urgent,” Brzeski said. The proposals in the single-digit billions on the table now are indicative at least of an initial appetite for stimulus, though “a drop in the bucket” by themselves, he said.

Before it's here, it's on the Bloomberg Terminal.