Any German stimulus measures could backfire: Bundesbank

17th October 2014, Comments 0 comments

The German economy, currently slowing sharply, does not need additional stimulus and any such measures could backfire, the head of the central bank or Bundesbank, warned on Friday.

"With the economy operating at normal capacity utilisation, Germany is not in need of stimulus," Bundesbank president Jens Weidmann told a conference in Riga.

"On the contrary, in the face of coming demographic challenges, costly stimulus measures could even backfire via negative confidence effects," the Geman central bank chief, also a policymaker at the European Central Bank, argued.

Earlier this week, the German government was compelled to slash its growth forecasts for both this year and next year to take into account economic fallout from geopolitical crises such as Ukraine, weak eurozone growth and a slowing global economy.

The increasing gloom over Germany, traditionally Europe's growth engine, has cast a pall over the outlook for the entire single currency area and fears that the long-running euro area crisis could re-erupt.

In response, there are growing calls for Germany to loosen its public purse strings to kick-start growth.

But Weidmann insisted that the revised economic forecasts "still foresee growth in line with potential".

Weidmann was adamant that he was not dismissing increased investment in principle.

"Where Germany's growth potential is concerned, there is agreement that higher public investment does have a role to play," he said.

But "it is important that all investment measures are judged on a case-by-case basis, as we have seen in the past that not all public investment measures have been money well spent."

The focus should be "on shifting priorities in public expenditures. There is no need for a debt-financed fiscal stimulus, but for a structural shift of govern-ment expenditures from consumption to investment," he argued.

Debt totalling more than 2.0 trillion euros ($2.6 trillion) and the huge demographic burden Germany faced in the coming years would weigh on its growth and public finances, the German central bank chief said.

"In that light, pursuing a balanced budget makes perfect sense for the country," Weidmann insisted.


© 2014 AFP

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