FRANKFURT (MNI) – Germany’s economy is clearly in the process of
recovering and, despite a slowdown early in the year, it will regain
momentum in the current quarter, European Central Bank Governing Council
member Axel Weber said Monday, reiterating a view already expressed by
the Bundesbank, which he heads.
Germany’s labor market remained robust during the crisis and
because of this consumption is expected to be stable in the recovery,
Weber told an audience in New York, according to a prepared speech
provided by the Bundesbank.
However, he warned that further write downs by German banks are
still anticipated and potential output could be lower for some years to
come than it was before the crisis.
Nevertheless, the German economy is “clearly in the process” of
recovering from the deep downturn it experienced in late 2008 and early
2009, he said.
At the turn of this year, activity was dampened both due to the
fading of fiscal stimulus and the inventory cycle.
Relatively cold and snowy winter weather was “an additional
burden,” on Germany’s recovery process, Weber explained. The trend,
however, stayed “basically” intact and “the recovery process is expected
to regain momentum in the second quarter of 2010.”
Exports are expected to again play an important role in the
country’s recovery.
“However, unlike earlier economic downturns, the labour market
stayed surprisingly robust throughout the crisis. As a consequence,
consumption activity is this time comparatively stable, therefore
supporting the economic growth process,” he said.
Still, there are “obvious” footprints of the financial turmoil and
economic downturn in Germany, Weber reminded. The most obvious of these
is in the banking sector, where total writedowns of German banks thus
far totals approximately US$98.9 billion.
“And further losses, especially in the form of write-downs on
loans, are still to be expected,” he said.
The financial crisis brought to an end a period of “very
prosperous, but ultimately unsustainable global economic growth,” Weber
stated. It could take some time before global output and world trade
“return to a solid growth path.”
This development will not be without consequence to the German
economy, he reminded. The most obvious effect will be through lower
foreign demand. “But potential output is also likely to be significantly
lower for some time than in the years preceding the financial crisis.”
While some of Germany’s gains have been lost because of the crisis,
Germany remains in a “relatively good position” compared with other
countries, especially some Eurozone states, Weber remarked.
The lack of structural imbalances within the domestic economy
avoided “additional burdens,” such as a pre-crisis construction boom or
housing price bubble bursting during the crisis, he said.
“Still, the deterioration in public finances as well as the altered
conditions for global economic growth pose substantial challenges in the
coming years,” he cautioned.
Dismissing criticisms of the German “business model” in which
supposedly export growth and wage moderation throttle domestic spending
and thus contribute to global imbalances, Weber insisted that “high or
growing export shares are not necessarily associated with current
account surpluses.”
There are different drivers for both developments in Germany, Weber
said. Export strength is due to high quality products and strong world
trade during the last economic upswing.
Current account surpluses “stemmed from relatively weak domestic
demand, but this weakness was not due to macroeconomic demand management
or general unwillingness of Germans to spend.”
Rather, the weakness “was a by-product of the correction” of
certain structural problems: “Wage growth remained low even as rising
employment reduced structural unemployment, and fiscal policy was
restrictive in order to bring down excessive public deficits.”
Normally, domestic demand would have accelerated as the correction
developed and the upswing matured, “but before that the global financial
crisis intervened,” Weber argued.
In Weber’s view, the problem is not Germany’s current account
surpluses, but more about how these have been used abroad. In some EMU
countries, particularly those with large pre-crisis current accounts
deficits, the benefits of monetary union have not always been “used
wisely” and have tempted countries to live beyond their means, he said.
Now, however, the financial crisis has shown that this development
is unsustainable and the need for domestic adjustment becomes ever more
apparent, Weber noted. “Given this, attempts to blame Germany for
problems in those countries and policy recommendations of symmetrical
adjustment needs are questionable.”
Still, major challenges in economic and fiscal policy remain in
Weber’s home country. “But instead of artificially propping up demand,
economic policy should strive to enhance the framework for economic
growth,” he urged.
“Confidence in the soundness of public finances is an important
prerequisite for the anchoring of stable and moderate inflation
expectations,” and indeed there is no alternative to cutting public
deficits, he said.
The European Union’s Stability and Growth Pact, along with
Germany’s new “debt brake,” bill have set out a necessary path to
consolidation. Germany must “stay the course in order to regain its
fiscal scope of action, to be prepared for the future fiscal burden of
an aging population and, last but not least, to set an example for
consolidation in Europe,” he said.
He observed that failing to initiate a “credible” and “ambitious”
consolidation process soon could be at least as great a risk to recovery
as unwinding stimulus measures too early.
–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com
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