MNI INTERVIEW: Germany Postpones Tough Adjustment-EFB's Janeba

Germany will face a tough job restraining spending next year in order to again avoid a European Union excessive deficit procedure, though there are encouraging signs that the government is prepared to push through reforms and accelerate the country’s transition from an outdated economic model, European Fiscal Board Member Eckhard Janeba told MNI.

Berlin only dodged an EDP this year because spending growth turned out below the country's EU-approved reference trajectory over a two-year period, Janeba said in an interview, adding that the government has only postponed a tough economic adjustment.

"Further down the road it will be an issue as to whether it's credible to hold spending growth at the level that has been promised. That will become more of a political issue as we come closer to the next election." 

The country is running a deficit close to the 3% of GDP limit even after the EU’s Escape Clause for defence spending has been taken into account, he noted.

"It depends really on the denominator, on whether growth will pick up. The projections are very modest - around 0.9% - but every year now we have seen downgrades. If that continues, we will run into a problem". 

While it will be crucial for the governing coalition to maintain its public commitment to reform so that economic confidence can be sustained and stronger growth brings down the deficit, Janeba said he is hopeful, noting the positively surprising consensus reached on all key elements of Germany's pension reform plan. (See MNI INTERVIEW: German Pensions Model For EU Reform - Rocholl)

"That might give the government a little bit of a new push to act in other dimensions, such as tackling the challenges of population ageing and high energy prices,” Janeba said. "The problem is the still very low growth rate of the German economy. Tax revenues will not increase much in coming years, according to the latest official projections, and in the medium run you need to finance [spending] by higher taxes or by cuts in other spending."

ADJUSTMENT POSTPONED

The coalition government has delayed the question of where to find money for its spending increases until after the next election which has to be held by early 2029.

"The major adjustment is only postponed. Whereas we have increases of spending of around 6% this year and the next two years, the plan is to constrain spending in 2029, so that is shifting the problem to the next government." 

The roots of the growth problem lie in Germany's failure to transition from the core sectors of its traditional economic model, such as autos, machine tools and chemicals, and into more innovative and more productive growth sectors, such as aerospace and AI. 

"It's not happening. We see increases in service sector activity, such as healthcare, but this is not where the high productivity growth that Germany needs is going to happen. We see a decline in economic activity in core sectors but no shift towards innovative sectors - that enjoy higher growth,” Janeba said.

Defence to some extent can help absorb workers and resources released by ailing industries and could bring spillovers too, although those will take time to emerge, he said. 

"You have to focus on other industries and that is more about industries being held back by excessive bureaucracy, high social security costs and labour market regulation." 

There is no shortage of promising and dynamic start-ups in Germany but scaling up is tough them, largely due to Germany and Europe's lack of adequate access to risk capital.  (See MNI: Eurozone To Urge Slightly More Fiscal Expansion - Sources)

MNI INTERVIEW2: Yuan To Rise Against Euro Amid Forex Tensions

The yuan is likely to appreciate moderately against the euro in the second half of the year, as exchange rates remain a focal point of China-EU trade frictions, but to fluctuate within a band against the greenback, a leading Chinese economist told MNI in an interview, in which he said Beijing should be alert to a possible joint U.S.-EU push for a stronger yuan.

"In the period ahead, the yuan-dollar pair is likely to remain range-bound, but the RMB's basket effective exchange rate may continue to see very modest appreciation,” Zhang Ming, deputy director of the Institute of World Economics and Politics at Chinese Academy of Social Sciences, said in an interview.

The yuan should fluctuate within a band of 6.60–7.0 to the dollar in the second half, with limited room for further appreciation from the current 6.80, Zhang said, adding that the yuan’s strength against the greenback since last year has been primarily driven by a weaker dollar index. DXY is likely to move between 97 to 103, while the RMB China Foreign Exchange Trade System index of a basket of currencies should move within the 99–104 range, he said. (See MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng)

Foreign-exchange settlement by Chinese exporters is also likely to slow down in H2 as the pace of yuan appreciation against the dollar moderates, Zhang said.

MERZ

German Chancellor Friedrich Merz said last month that the yuan's real effective exchange rate has been undervalued by the 30%, but Zhang said this is not the case, pointing to China’s capital account deficit in 2025 of USD820 billion, which is larger than the current account surplus of USD735 billion in 2025.

“It is hard to say a currency is severely undervalued when its country’s current account surplus is smaller than its capital account deficit,” Zhang said.

Still, he saw a possibility that the U.S. and Europe could reach agreement on a joint approach to pressuring Beijing to strengthen the yuan.

Any imaginable yuan appreciation would do little to narrow China’s trade surplus, Zhang said. Even a 10% strengthening against the euro would not diminish the country’s competitive advantage, he said, adding that Europe should instead relax restrictions on Chinese investments in Europe, or increase currently-restricted exports of high-tech goods to China.(See MNI INTERVIEW: New Restrictions To Hit China Investment In EU)

While China’s current account surplus pushes the currency higher, the non-reserve financial account is in deficit, Zhang noted. In the first quarter of 2026, China's current account surplus stood at USD184.1 billion, while the non-reserve financial account deficit reached USD136.1 billion.

Though the yuan has recently stabilised at around 6.80 to the dollar, the CFETS index rose to 102.65 last week, the highest since July 2022. The dollar accounts for approximately 18.3% of the CFETs basket, the euro 17.9% and the yen 8.1%.

MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus

China is likely to introduce additional stimulus measures including new special treasury issuance by as early as the Politburo meeting at the end of this month to counter the downward economic pressure driven by the Iran war and meet the national growth target, a leading policy advisor told MNI, arguing that the central government has ample fiscal space.

Indicators reflecting domestic demand fell short of expectations last quarter, with a fall in fixed asset investment particularly concerning, said Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Without further stimulus this month, weak momentum may continue into the second half, with sluggish consumption and investment dragging on growth.

China should issue additional special treasury bonds to fund stimulus, Zhang said in an interview, adding that the People's Bank of China is also likely to cut its interest rate later this year. The government could also increase this year's quota for policy-based financial instruments, providing capital for local infrastructure projects, including those under construction, helping ease local fiscal pressures, he suggested. (See MNI INTERVIEW2: Chinese Economist Suggests QE To Boost Demand)

The fiscal plan made at the beginning of the year did not account for the effects of the U.S.-Iran conflict, which caused oil prices to rise significantly and dealt a negative shock to China's economy, he said.

At the same time, while China’s 2026 economic growth target is 4.5%–5%, officials still hope for an outcome at the higher end of the range, he noted, pointing to policymakers’ call for “ better results in actual work” when the objective was announced.

SPECIAL TREASURIES

The government has already authorised CNY1.3 trillion in ultra-long-term special treasury bonds to support investment and consumption, but the quota was mainly used up in the first half, according to the National Development and Reform Commission.

"Whether China's economy can be activated in the short term depends on fiscal policy,” Zhang said. Government-led infrastructure investment is essential, given the weakness in consumption and investment demand, he said. 

Interest rate cuts and reserve requirement ratio reductions are called for as well, with rate cuts helping lower mortgage rates and stimulate property markets in first- and second-tier cities, which would be critical for stabilising real estate prices around the country, according to Zhang. It would also have marginal positive effects for business operations, he said.

The pace of monetary easing should not be slowed because of a rise in inflation driven by oil prices at a time of weak demand, Zhang said, adding that without stimulus inflation is likely to fall back in H2. (See MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP)

MNI: China Electricity Demand On Target, Despite H2 Slowdown

China's electricity demand is expected to slow in H2 after rising 5.9% year on year during January-May, but remains on track to meet the government's 5-6% growth target, supported by strong industrial activity, analysts told MNI.

Electricity consumption in the first five months accelerated from 2025's 5.0% growth, largely reflecting robust expansion in advanced manufacturing, which accounted for around one-third of the increase in industrial electricity demand, said Qin Qi, China analyst at the Centre for Research on Energy and Clean Air. High-tech and equipment manufacturing consumed 109.1 billion kWh of electricity in May, up 12.2% from a year earlier, generating about 11.9 billion kWh of additional demand, compared with roughly 33 billion kWh of incremental industrial electricity consumption overall, Qin calculated.

However, a weak base also boosted year-on-year comparisons. Electricity demand grew only 3.4% during January-May 2025 before strengthening later in the year, meaning second-half comparisons will become more challenging. This suggests that growth is more likely to stay within the government’s forecast range than to significantly exceed it, Qin said. Still, persistent summer heat, combined with continued resilience in high-tech manufacturing and export-oriented industries, could keep full-year demand growth in the upper half of the target range, she added.

Weather remains an important factor, as current forecasts suggest El Niño could bring frequent typhoons to China's eastern coast while reducing rainfall in central China and the Three Gorges region by as much as 30%, creating considerable uncertainty around electricity demand, said David Fishman, principal at Shanghai-based energy consultancy the Lantau Group. The National Bureau of Statistics also highlighted unusually hot weather in its latest monthly briefing, noting that summer arrived earlier than normal and above-average temperatures boosted electricity demand, Fishman added.

This was reflected in May's data, with electricity consumption in the services sector rising 9.7% year on year and residential consumption increasing 7.5%. Simultaneous strength in both sectors is typically associated with weather-related cooling demand, he noted.

However, not all of the increase was weather-driven. Fishman said the services sector is also benefiting from structural growth in electricity-intensive activities such as EV charging infrastructure and internet data services, including data centres and AI computing. Unlike temperature-related demand, these drivers are structural rather than seasonal and are expected to continue supporting electricity consumption over the medium term, he argued.

While Fishman does not expect full-year electricity demand growth to match May's 6.9% pace, he said annual growth of 5-6% remains a realistic baseline.

FIVE-YEAR PLAN

The recently released 15th Five-Year Plan for Building a New-Type Energy System, covering 2026-2030, implies annual demand growth of around 600 billion kWh through 2030, only about 5% above the average annual increase recorded during the 14th Five-Year Plan period, Qin said.

However, because demand is expanding from a much larger base, this translates into a compound annual growth rate of roughly 5.2% between 2025 and 2030, compared with about 6.7% during 2021-2025, Qin said. "In other words, China is expected to add more electricity consumption in absolute terms each year while growing at a slower percentage rate," she said.

Fishman said the plan also targets an increase in electricity's share of final energy consumption from around 30% to 35% by 2030, a level that should allow electricity demand to continue growing faster than GDP. Based on clean-energy capacity additions implied by current planning targets, which are lower than the exceptionally high levels seen in 2024 and 2025, renewable generation alone is unlikely to supply that amount of incremental electricity each year, he noted. If demand grows in line with the plan's implied trajectory, thermal generation would likely need to resume its expansion between 2026 and 2030 to bridge the gap, Fishman concluded.

MNI INTERVIEW: Weaker Yen To Drive Sept Hike - Ex-BOJ's Sakura

The Bank of Japan will likely raise the policy interest rate to 1.25% from 1.0% in October, although a weaker yen approaching JPY165 could prompt policymakers to move as early as September, former BOJ board member Makoto Sakurai told MNI, forecasting a terminal rate of 2.0-2.5% by 2028.

"My main scenario is an October rate hike, when economic data for the July-September quarter will be available," said Sakurai, who served on the BOJ's board from 2016 to 2021. "Looking ahead, inflation will likely accelerate further, increasing pressure on the BOJ to raise the policy rate based on the same logic it adopted in June, namely easing downside risks to the economy and rising upside risks to prices."

Sakurai had given a June hike a 50-50 chance when interviewed by MNI in May, with Governor Kazuo Ueda's appetite for containing inflation the deciding factor. (See MNI INTERVIEW: Ex-BOJ's Sakurai Sees 50-50 June Hike Odds)

This time, Sakurai said a weaker yen could increase the likelihood of a September hike if it approaches JPY165, adding the government would not oppose tighter policy under those circumstances due to pressure from U.S. authorities.

If inflation accelerates further, the BOJ could deliver another hike later this fiscal year after raising rates in either September or October, he said. Sakurai expects the terminal rate to reach 2.0-2.5%, depending on inflation, with the policy rate rising to at least 2.0% before Governor Kazuo Ueda's five-year term ends in April 2028.

Delaying further tightening would leave the BOJ behind the curve and trigger a much weaker yen, he warned.

Overnight index swaps imply around a 20% chance of a September hike, with 40% priced for the October meeting and a 1.22% policy rate expected by December.

FISCAL CONCERNS

Sakurai cited the government's proposed consumption tax cut, its Honebuto no Hoshin growth strategy, budget requests for fiscal 2027 and a second supplementary budget for the current fiscal year as factors that would increase selling pressure on the yen, potentially pushing it to JPY170-180 against the dollar.

"Prime Minister Takaichi doesn't understand the warnings from market participants who are deeply concerned about Japan's fiscal position, although she does pay some attention to market volatility," he said, arguing the yen had continued to weaken and long-term interest rates had risen because of declining confidence in her fiscal policy. "Takaichi isn't afraid of Ueda, but she is paying close attention to U.S. Treasury Secretary Scott Bessent, who sees a weak yen and high JGB yields as troublesome for U.S. financial markets."

The dollar traded around JPY162.60 in Tokyo on Thursday, below the levels that prompted Japanese authorities to intervene in the foreign exchange market in late April and early May. Sakurai said the key question is how much further dollar/yen can rise before Bessent loses patience, adding that Washington views Japan as responsible for the yen's weakness.

BOND YIELDS

Long-term bond yields continue to climb because of persistent concerns over Japan's fiscal outlook amid Takaichi's expansionary policies, he said.

The benchmark 10-year JGB yield rose to 2.885% on Thursday, its highest level since October 1996, a level Sakurai said was not especially high in absolute terms. But the pace of the increase was placing significant strain on smaller financial institutions and life insurers, he noted, adding that the yield could rise toward 3%.

The rapid rise in yields has discouraged institutional investors from buying JGBs, creating a vicious cycle in the bond market. Persistently high yields alongside rising inflation risk destabilising Japan's financial system, he warned.

MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber

An eventual trade deal between Canadian PM Mark Carney and U.S. President Donald Trump is all but certain to include some tariffs, and the challenge will be to avoid other trade barriers that further damage investment, a Canadian Chamber of Commerce leader told MNI after meeting the finance minister.

“I don't think tariffs are going anywhere anytime soon," David Pierce said in an interview Tuesday. The Chamber's government liaison is also a former parliamentary director for Canada’s industry department and ministerial adviser, and he met Francois-Philippe Champagne Monday at a roundtable preparing the fall budget.

"The real focus needs to be on getting a deal that is recognizing the importance of the integrated supply chains that we have, hopefully building new ones, and at the same time not accepting a bad deal,” Pierce said.

“The sooner both sides come to the table and land on the path forward, I think that's critical for both sides," he said. "As was originally agreed to with Trump One, that agreement ensures that the vast majority of goods traded between Canada and the United States do so tariff-free.” (See: MNI INTERVIEW:US-Canada Deal Must Drop 232 Tariffs-Steelmakers)

CAN'T JUST MATCH

Carney says while tariffs on steel, aluminum and autos on national security grounds are unjustified, Canada has kept a preferential rate after Trump imposed global levies. Canadian and U.S. officials have also traded accusations over slowing down talks and in the meantime Carney has offered relief subsidies.

Canadian firms are still closing or moving to the United States. Four in 10 manufacturers surveyed by KPMG have moved production south of the border or are considering such a move because of trade and competitiveness difficulties. Pierce, whose chamber represents 200,000 organizations, says that figure understates the problem. 

He told Champagne about CEOs reluctant to invest because taxes and regulations make profitability unclear. Tax cuts and deregulation in Trump's second term worsen Canada's position, Pierce said.

“We can't just match these things, we need to compete (that's) certainly what we told the minister,” he said. One example is the “Eifel” tax rule limiting deductions firms can claim from interest repayments on their borrowing, Pierce said.

The United States last week declined to renew the United States-Mexico-Canada (USMCA) agreement, triggering a decade of annual reviews.

SHORT WINDOW

Champagne touts Canada's low tax on new investment, a perspective Pierce calls too narrow. “That's not the amount that companies pay at the end of the year when they look at their tax bill, that's one line of probably 20 lines.”

High energy prices are an opportunity for new investment, he said. Carney's approach to fast-tracking a handful of large projects is helpful but not enough Pierce said. 

“What about the other 500 projects?" he said. "With everything that's happened in the Middle East, the world is looking for a new supplier of energy, and this is a really short window that Canada has."

Carney and Alberta's premier said last week that after seeking a private investor governments will build a west coast oil pipeline reducing U.S. export dependence, which Pierce said indicates weak business conditions.

URGENCY WITHOUT RUSHING

“For now the government really doesn't have much of a choice, it's got a mandate to build. There's a critical need to build Canada's infrastructure, and so they've taken a very bold and I think very reasoned decision to be the funder,” he said.

After GDP stalled in Q1 most economists see modest growth over the rest of the year assuming no breakdown in U.S. trade, with some rebound in business spending leading the central bank to hike twice over the next year.

While a return to economic health may well be in the cards, that overlooks differences between firms avoiding tariffs and those struggling, Pierce said. Carney's main political rival has targeted the prime minister for failing to get a deal, though Carney remains well ahead in the polls. 

Pierce supports Carney's view of urgency without rushing to agreement. "Just signing on any deal could be unhelpful, because it wouldn't address some of these real irritants that are really keeping jobs and parts of the economy at risk.”

MNI: Spain To Support De Cos For ECB Head After Initial Doubts

The Spanish government has finally decided to throw its support behind Bank for International Settlements General Manager and former Bank of Spain Governor Pablo Hernandez de Cos to succeed Christine Lagarde as president of the European Central Bank, sources in the Spanish government told MNI.

While Hernandez de Cos has been widely mentioned as a leading candidate for the ECB’s top job, which is due to become available by October 2027, Madrid had previously showed little enthusiasm for supporting him in the European horse-trading to decide the role. Instead, Prime Minister Pedro Sanchez was tending towards his former deputy Nadia Calvino, currently serving as European Investment Bank president, or former Bank of Spain Deputy Governor Fernando Restoy, sources said.

However, Sanchez has realised that Hernandez de Cos would be the only Spaniard with chances for broad support in the EU, one of the sources noted.

Hernandez de Cos was appointed as Bank of Spain governor in 2018 by the former centre-right government and had irritated Sanchez by publicly questioning some of his policies. But he is now widely seen as a front-runner for the ECB presidency, alongside former Dutch National Bank Governor Klaas Knot.

The race is set to be very competitive and other candidates are likely to emerge, one of the sources said. (See MNI SOURCES: Cheaper Oil Gives ECB Room Before Next Hike)