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At the IMF, Germany Comes Under Pressure to Stimulate Growth

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04/14/2019 | 08:15am EDT

By Brian Blackstone

With the global economy slowing and showing signs it may need support, economists are pointing fingers at Germany and a few other countries that are in a position to provide a lot of stimulus but are choosing not to.

What stimulus measures policy makers can use to support their flagging economies has been a key issue during weekend meetings at the International Monetary Fund in Washington. In its annual report on global fiscal policies, the IMF singled out Germany, Korea and Australia as places where fiscal stimulus could makes sense. Earlier this month, the IMF called on Switzerland to ramp up public spending.

The IMF, backed by the U.S., has pressed Germany and others with budget surpluses to cut taxes or raise spending to prop up growth. Countries with budget surpluses "should certainly make use of it and have the space to invest and to participate in the economic development and growth," IMF Managing Director Christine Lagarde said, "but not enough has been done on that front."

Treasury Secretary Steven Mnuchin said he agreed with the IMF's stance on surplus countries such as Germany. The U.S. is now running large deficits.

The idea behind debt-financed stimulus is that when economies are weak, governments substitute for a lack of private demand through spending or tax cuts. In times of intense stress such as the global financial crisis a decade ago, economists agree that governments should do all they can to prop up growth.

But using large-scale fiscal stimulus to address an economic soft patch has met with resistance from countries like Germany that run a conservative economic policy.

Germany's finance minister Olaf Scholz fired back at criticisms, pointing to increased public investment, reduced taxes and higher support for low-income families.

"It would be a very nice service if you could tell the rest of the world that they are demanding something we already did," he said to a reporter at a press conference Friday. Germany's stable finances put it in a better position to respond to the next recession, he said, and the current global risks aren't Germany's finances but rather "man-made" ones including Brexit and trade disputes.

Korea runs an annual budget surplus and Australia is expected to swing to a surplus in the coming years. Unlike Europe, these economies don't appear to be in need of much stimulus, and their central banks have scope to cut interest rates if needed.

Germany and Switzerland are using annual surpluses to cut debt and prepare for expected budget strains from future retirees. Germany's position is the most relevant among surplus countries given its dominant role in European growth and politics. If Germany were to launch a big stimulus program, it could encourage deficit countries like France and Italy to ease off measures to bring their budgets closer to balance. European rules set a ceiling on deficits of 3% of gross domestic product, though exceptions are made in times of stress. The U.S. has no such limit.

Germany's export-dependent economy contracted in the third quarter of last year and was flat in the fourth. A string of weak manufacturing figures suggests it could contract again in the first half of this year. That soft patch will affect the 19-member eurozone, where Germany is the biggest member, and ripple across non-euro countries like Switzerland that rely on Europe for exports.

China's economic slowdown "has hit the Germany economy hard, and there is a good case for using fiscal policy to smooth [the] adjustment," said Ken Rogoff, professor at Harvard University, noting Germany's "huge latitude" from its low public debt, which equals less than 60% of gross domestic product and could shrink to less than 50% by 2022 according to IMF estimates.

Germany has run annual surpluses since 2014 and is expected to do so through 2024, according to the IMF. Tax revenues have increased 8% since 2017, faster than welfare spending, and working Germans today pay the second highest level of income tax of all members of the Organization for Economic Cooperation and Development, behind only Belgium.

The U.S. position is in stark contrast to Germany's despite facing similar problems with old-age spending. The government has pumped the U.S. economy with tax cuts and higher spending with the aim of generating 3% annual GDP growth rates. Annual deficits are over 4% of GDP.

The hope is that by expanding the size of the economy, the U.S. will be in a better position to service its debt down the road. The usual side effects of stimulus -- higher bond yields and rising inflation -- have failed to materialize, strengthening the argument of the stimulus camp and weakening Germany's view that it's best to keep the powder dry for the next recession.

Germany is "currently learning the hard way that they are the only country around playing according to these rules," said Carsten Brzeski, an economist at ING Bank.

--Bertrand Benoit contributed to this article.

Write to Brian Blackstone at brian.blackstone@wsj.com

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