MNI EXCLUSIVE: Brexit Deal Cuts German Fiscal Stimulus Hopes

By David Thomas

     BRUSSELS(MNI) - The falling likelihood of a hard Brexit and the prospect

for a partial trade deal between China and the U.S. are reducing the chances of

a substantial German fiscal stimulus, despite urging from the European Central

Bank and a deterioration in the bloc's largest economy, European Union officials

say.

     "The view from the [German] Chancellery is that a hard Brexit will now be

avoided and trade tensions - the tentative U.S. and China deal - that things

won't be so bad. They believe Trump will want to avoid further trade tensions

before the (U.S. presidential) election," a source from the Eurogroup of

eurozone finance ministers told MNI.

     "The Germans (and the Dutch) like all other countries have just submitted

their draft budgetary plans. I don't think there's a readiness to move beyond

this."

     The draft budgetary plans see Germany's budget surplus falling to 0.75% of

GDP in 2020, from 1.25% this year, while the Netherlands' surplus will slide to

0.2% of GDP next year, from 1.3%. A Commission source told MNI these plans were

already "quite expansionary".

     The European Central Bank has redoubled calls for eurozone states with

fiscal capacity to spend more, saying that monetary policy cannot bear the

weight of maintaining economic expansion alone. It has also called for the

eurozone to develop its own fiscal capacity.

     --CONSTRUCTION AT CAPACITY

     So far Germany's governing Christian Democratic Union is showing little

sign of ceding to calls for more spending, one EU central bank observer of

fiscal trends said.

     "The current line seems to be that 'we are ready if needed - if we get a

real recession or things get even worse than they are,'" the source added.

     German officials insist that another quarter of negative growth in Q3 would

be merely a 'technical recession', without need for further fiscal stimulus,

which they fear might overheat a construction sector already working at

capacity. A Bundesbank Monthly Report shows 2020 growth back to 1.0% while the

recent IMF World Economic Outlook has it at 1.2%, bolstering those hopes.

     One possible source of a change in stance may come from the German

government's junior coalition partners, the centre-left SPD, which holds its

Party Congress in December and may be tempted to leave government unless

spending is increased.

     The European Commission has yet to produce its recommendation on what it

sees as the appropriate fiscal stance for the eurozone in 2020, although one

official close to its thinking said that it is likely to be a "little bit

expansionary", as in 2019.

     --COMMISSION OPINION

     The Commission will also issue its opinions on member states' draft

budgetary plans at the end of November, which an official said will be done in

close consultation with the incoming team of Economic Affairs Commissioner Paolo

Gentiloni.

     While Gentiloni will push Germany to do more, the old Commission may not

want to use its dying days to issue radical opinions on any country's fiscal

stance, the official said, noting that, with most countries in the bloc doing

better, there is less of an argument for Germany to act as a motor for the

eurozone as a whole, the official said.

     Further out, much will depend on the views of new Commission President

Ursula von der Leyen. While she had to canvas the centre-left to get the job,

sources believe that she is likely to revert to a mainstream CDU view on fiscal

policy when in office. The Commission is due to issue a review of the EU's

current fiscal regime in the coming months.

     "By the end of the year, we will have some indications as to how much

appetite there is for change," the Commision source said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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