German Finance Minister Rejects Fears of Serious Downturn (FT)
Last Modified: 11:00 PM, Thu Feb 07, 2019

Guy Chazan in Berlin

FT.com. 08 February 2019

Scholz concedes slower expansion will lead to tension on spending priorities

Olaf Scholz, Germany’s finance minister, has rejected fears that the country is heading for a serious economic downturn despite mounting evidence of weakening eurozone growth.

But in an interview with the Financial Times, Mr Scholz warned that Germany’s public finances would come under strain as slowing growth brings an end to a run of massive budget surpluses.

Mr Scholz said the German economy was “continuing to move forward” and that employment was at a “truly remarkable” high. “A lot of companies are very confident about their future prospects,” he told the FT.

But he acknowledged that a slower pace of expansion would lead to lower tax receipts and increased pressure on the budget, setting the stage for a growing battle over spending priorities.

“We can afford a lot, but not everything, and not at the same time,” he said in a warning to sparring ministers in Angela Merkel’s “grand coalition”.

He was speaking as unease spread in Europe that the region — and its largest economy, Germany — could be heading for a downturn. The European Commission on Thursday cut its German gross domestic product forecast this year to 1.1 per cent from 1.8 per cent, while regional forecasts were revised from 1.9 per cent to 1.3 per cent.

German industrial output unexpectedly fell in December for the fourth consecutive month, data showed on Thursday, and a closely watched gauge of business confidence sank to a three-year low in January. German GDP contracted slightly in the third quarter of last year.

Deutsche Bank economist Stefan Schneider wrote this week that the fact key indicators were moving below trend and continuing to fall provided a “clear indication that Germany is drifting into recession”.

However, other economists are less downbeat. Marcel Fratzscher, head of the German Institute for Economic Research, said last week that “pessimism and talk about [a] recession are misplaced”.

Mr Scholz, who has been finance minister for almost a year and is also deputy leader of the German Social Democratic party, rejected calls by the SPD’s coalition partners, Angela Merkel’s Christian Democrats, for tax cuts to stimulate the economy and nip any potential downturn in the bud.

Finance ministry officials have revealed that the government will face a budget shortfall of around €24.7bn by 2023, largely because tax revenues will come in below previous estimates.

“What is new is that we can no longer secretly assume that by the end of the year we will have raised more taxes than we planned to,” he told the Financial Times. “Wherever there are additional spending requests, we will have to make savings somewhere else.

Germany’s government has made a series of big-ticket spending commitments that could put substantial pressure on the budget, especially if the downturn worsens.

Last month a government-appointed commission set out a plan for Germany to phase out all its coal-fired power stations by 2038, a programme that if adopted could cost taxpayers as much as €80bn over the next 20 years.

Germany has also pledged to increase defence spending to 1.5 per cent of GDP by 2024, from 1.24 per cent last year, partly in response to repeated accusations from US president Donald Trump that it was not spending enough on its military.

In a wide-ranging interview, Mr Scholz insisted Germany would pay for the coal phase-out “without having to take on new debts or raise taxes”.

“The German budget is about €350bn. We can finance everything that we consider important,” Mr Scholz said. “But the government does have to set clear priorities.”

Mr Scholz was at pains to present himself as a worthy successor to Wolfgang Schäuble, the hawkish German finance minister who was famed for his commitment to balanced budgets — known in German as the “schwarze Null” or “black zero”.

“The clear precondition of all government budgetary planning is that we achieve a balanced budget, without new debts,” Mr Scholz said.

But he also emphasised his Social Democrat credentials, stressing the need for “social cohesion” and the importance of the welfare state.

Mr Scholz also threw his support behind government efforts to develop an industrial strategy designed to protect and promote Germany’s national champions. On Tuesday Peter Altmaier, economy minister, said the state should be allowed to acquire big German companies that were threatened by hostile foreign takeovers.

Mr Scholz said such a strategy should seek to put Germany at the forefront of efforts to produce electric cars and battery cells. But it should apply to the financial services industry, too.

Since he became finance minister last year, speculation has grown that the government might support a merger between Commerzbank and Deutsche Bank, Germany’s largest lender, which is struggling to convince investors it can reverse persistent declines in revenues. Deutsche’s share price has fallen almost 50 per cent over the past year.

Mr Scholz, whose team has often met executives of Deutsche, Commerzbank and their major shareholders, declined to talk about a possible merger, but insisted Germany needed a homegrown banking champion.

“We . . . need German banks that can develop the ability, competence and strength to accompany globally active German companies on global markets,” he said.

On Europe, Mr Scholz said the EU might emerge stronger from Brexit, saying that the UK’s looming exit from the bloc and Europe’s trade tensions with the US had “made [the EU] grow closer together”. “I think there is a good chance we can gain a new European momentum,” he said.

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Publication: FT.com
Organization: European Commission, Deutsche Bank AG, Commerzbank AG, Social Democratic Party Germany, Financial Times, European Union
Location: UK, Europe, US, Germany
People: Stefan Schneider, Stefan Schneider, Angela Merkel, Olaf Scholz, Wolfgang Schäuble, Olaf Scholz, Marcel Fratzscher, Donald Trump, Peter Altmaier, Guy Chazan
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