MNI INTERVIEW: German Gov Plans, Tariff Hopes Lift Sentiment

German analysts’ economic confidence has improved thanks to government spending plans and hopes of a trade deal with the U.S, but the public is less sure., a leading German economist told MNI.

“There is a genuine expression of optimism in this sentiment,” Leibniz Centre for European Economic Research (ZEW) president Achim Wambach said, after July’s Indicator of Economic Sentiment rose 5.2 points on the previous month, to 52.7 points - adding nearly 70 points from April’s annual low. 

While higher tariffs - such as the 30% currently proposed by U.S. President Donald Trump -  would be a “serious blow” to the German economy, the biggest improvement came from the automobile, steel and chemical industries, all exporters, he said in an interview.

“I personally am more optimistic that we will get a good deal with Trump,” Wambach added. “There is also a lot of hope that the new German government will deliver; that the additional investment truly will add to growth.”

While Europe needs higher productivity, greater innovation, and above all a more closely integrated internal market if it is to become truly competitive on the global stage, Wambach said there was hope. 

“For trade within Europe, according to an IMF study, there is the equivalent of more than 30% tariff for goods and more than 100% for services. So we need internal market reform. Fortunately, I think the message has arrived. And if you want to make the argument that you can do the necessary structural reforms only during a crisis, well - we are there.”

BOOST TO GROWTH

Germany’s planned EUR500 billion infrastructure fund could add around 0.5% per year to GDP, Wambach said, citing recent German Council of Economic Experts analysis. However there are concerns over how the money will be spent.

“We will definitely see price distortions, and the biggest worry, or debate, in Germany is that the government's money is just being spent on consumption, rather than investment,” Wambach said. “Underground construction, for example, is already at near capacity, which is a problem when you are talking about laying fibre cables. So there will be price increases in some sectors.”

Funds may also fail to flow through fully to urgently-needed state- and local projects, such as roads, bridges, and the electrical grid.

“A lot of that is run through private companies which operate on a profit and loss model.  Some cities are in so much debt that they will probably use the additional funds to repay some of their debts, so it would not be fully invested in infrastructure.”

Having signalled a willingness to boost defence spending to 3.5% of GDP by 2029, it would make sense for Germany to collaborate more closely with EU member states in both military procurement and strategy, Wambach said. (See MNI INTERVIEW: German Advisor Sees Possible Joint EU Debt Deal)

“But it will still be a case of equipping the German army, the French army, rather than a European army. And how dependent do you want to be on other European states? We will still have to buy a lot from the Americans.”

SPENDING DISCIPLINE

After exempting a one-off spending boost from strict constitutional spending rules - the so-called “debt brake” - German governments should limit their attachment to new borrowing, he said.

“At some point, military spending has to be part of the general budget, and not being financed by debt. Otherwise government debt will only continue to increase to the point where we can’t pay it back through growth, which will in turn increase pressure to cut other expenses.”

The public mood remains negative despite recent rises in net wages, while small companies remain in crisis mode after two very bad years, Wambach said.

“Even those consumers who are relatively happy with their own circumstances think the economy is in trouble. If next year we see some more growth then the positive moods will also come back to consumption.”

Changes to pensions and the care system, excessive bureaucracy and unnecessary costs remain significant hurdles to be overcome, Wambach said.

“These are hard problems. The government’s intentions are good, therefore there is reason for optimism. Whether they can deliver these good intentions we will have to wait and see.”