Weidmann Hits Back After Lagarde Criticizes German Surplus

Updated on
  • Bundesbank head speaks after criticism by IMF chief in a blog
  • Lagarde and Weidmann are both attending Frankfurt conference

Christine Lagarde and Jens Weidmann

Photographer: Sean Gallup/Getty Images

Jens Weidmann hit back at criticism of Germany’s current-account and budget surpluses by International Monetary Fund Managing Director Christine Lagarde, saying that increasing public spending would be the wrong way to go.

The Bundesbank president kicked off a joint conference by the two institutions by insisting that Europe’s largest economy doesn’t need more expenditure, though he agreed that it should be better planned. Public outlays should shift away from consumption and toward targeted investment, he said.

“Raising public spending in order to reduce Germany’s current-account surplus would likely be a futile undertaking,” he said. “This does not mean that there is no need for action on fiscal policy. Action is warranted to counteract the demographic drag on growth -- but action not with regard to the overall stance, but with regard to how the money is spent.”

Major Imbalances

Germany continues to outsell G-7 peers in global markets

Source: OECD Economic Outlook

Lagarde, who was also at Thursday’s event in Frankfurt, had written a blog post only a few hours earlier saying the government should invest its budget surplus to boost long-term growth. She said that would help with a current-account gap that is too large, even considering the need to save for retirement in an aging society.

“Boosting investment in the German economy and reducing the need to save for retirement by encouraging older workers to remain in the labor force can lower the surplus. We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension.”

IMF Communications Director Gerry Rice told reporters in Washington on Thursday that the blog was a “reaffirmation of a number of the things that we’ve said” previously, and that the ongoing dialog with Germany is “healthy.”

Germany’s current account has been a lightning rod for criticism, including from U.S. President Donald Trump’s administration, which considers it a sign of trade distortion. The gap has grown amid the fastest economic expansion since 2011 on the back of record-low unemployment, strong global trade and the European Central Bank’s expansionary monetary policy.

The surplus over the 12 months through November totaled 262 billion euros ($320 billion). The budget excess was 1.2 percent of gross domestic product last year, the biggest since reunification in 1990 and the fourth in row.

More than half the current-account surplus is beyond what could be expected from fundamentals, IMF chief economist Maurice Obstfeld said at the conference. He added that expanding public spending and improving the conditions for private investment would have positive social as well as economic effects.

Underlying Maladies

“Germany’s current account is not irrelevant nor outside the control of policy makers,” said Guntram Wolff, head of the Brussels-based Bruegel think tank. “A reduction in the current-account surplus shouldn’t be the target, but it is sign of the underlying maladies the German economy is suffering from.”

Still, Chancellor Angela Merkel’s Christian Democratic-led bloc and the Social Democrats agreed to continue with a policy of balanced budget in a preliminary accord to start coalition talks reached last week.

As the traditional ‘anchor’ of stability for Europe, Germany should continue its policy of budget restraint to ensure build up “resilience” ahead of the next crisis, German Finance Ministry chief economist Ludger Schuknecht said at the conference.

The prospect of the next crisis was acknowledged by ECB Executive Board member Benoit Coeure, even as he signaled that the currency bloc is finally shrugging off the last one.

“We ourselves at the ECB have stopped saying we want to strengthen the recovery -- it’s not a recovery anymore, it’s an expansion,” he said. “It’s not about moving out of the previous crisis, it’s about preparing for the next crisis.”

Wage Weakness

The conference delegates also examined why growth in German wages remains so weak -- a key concern for the ECB as it tries to the generate the sustained inflation that will allow it to end its emergency stimulus measures for the region.

Weidmann said migration from other European Union member states is partially responsible for muted wage pressures, and that labor unions are playing a part by insisting on reduced working hours and more training instead of higher pay. But he also noted that low pay growth is a widespread phenomenon, affecting countries including the U.S., the U.K. and Japan.

“When it comes to modest wage growth in the face of tight labor-market conditions, Germany is by no means unique,” Weidmann said. “This suggests that the factors responsible for holding back wage growth are not only idiosyncratic, but at least partly international as well.”

— With assistance by Andrew Mayeda, Arne Delfs, and Shelly Hagan

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