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Free AccessMNI INTERVIEW: Peak Car Means Germany Must Retool: Ex Wise Man
By Luke Heighton
FRANKFURT(MNI) - German manufacturing needs significant structural changes
if the country is to avoid recession, a former member of the German Council of
Economic Experts has told MNI, calling for a government-led industrial policy to
champion cutting-edge technologies such as hydrogen energy generation.
Peter Bofinger, professor of economics at the University of Wuerzburg and
from 2004 to February 2019 one of Germany's so-called 'Five Sages', said he was
pessimistic about the outlook for growth, with the decline in manufacturing
expected to spread to both services and labour markets.
"The industrial sector will have to change a lot," he said. "Global car
consumption reached a peak in around 2017 - partly as a result of efforts to
tackle climate change, but also as a consequence of lifestyle changes, with
companies like Uber making it much easier to get from A to B.
"You can already see that compared with other euro area countries we are
the weakest performer, together with Italy and Lithuania." The effects of global
and European slowdown are likely to show up more strongly in 2020, Bofinger
said.
His remarks contrast with those by Council Chair Christoph Schmidt, who
recently said that Germany does not need to reinvent its economic and industrial
policy, but should develop them further.
Bofinger described Schmidt's analysis as "strange," and highlighted
Germany's failure to match China in the production of car battery cells as
illustrative of the failure of market-based approaches to industrial policy
versus government-led initiatives.
Instead, Germany should become a global front-runner in developing hydrogen
energy technology, he said, advocating giving companies "very generous
allowances for depreciation - I would do what Trump did: 100% depreciation if
they do this transformation. With zero interest rates it doesn't cost the
government anything."
--LITTLE PROSPECT OF GERMAN FISCAL BOOST
But the impetus for such change seems unlikely to come from any increase in
government spending. Despite pointed calls for increased fiscal stimulus from
the European Central Bank, Berlin would in Bofinger's view only be likely to
loosen its purse strings if the Green party were to join the governing
coalition, or the centrist vice chancellor and finance minister Olaf Scholz
fails in his leadership bid for the centre-left Social Democrats.
Bofinger called for the European Commission to allow higher debt-to-GDP
ratios, so long as such deficits are used to finance infrastructure projects as
part of a European Green New Deal. These could be financed within the framework
of the Stability and Growth Pact via issuing joint-liability eurozone bonds, he
said.
Allowing fiscal deficits of 90-100% of output, rather than the 60%
currently permitted, would not only give more spending room to relative fiscal
scrooges like the Netherlands and Germany, but also permit countries like France
to do more, according to Bofinger.
The ECB "cannot do much" to pressure governments into fiscal expansion,
Bofinger said.
The central bank's upcoming monetary policy review should produce a
"comprehensive" overhaul of its strategy, resulting in an explicit inflation
target range and a new focus on levels of debt in the economy, he said, noting
that the failure to monitor credit was behind the global financial crisis.
Bofinger is a critic of the anti-ECB rhetoric common in Germany, which
portrays the central bank as depriving savers and pensioners of fair returns by
setting interest rates at low levels.
"It would be terrible for Germany if there were a major increase in
interest rates. It would damage our construction sector, which we rely on as a
stabilising element for our economy," he said, adding that he hoped that the
appointment of his former 'Five Sages' colleague Isabel Schnabel to the ECB's
executive board might help improve relations with the German public.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$E$$$,M$G$$$,M$X$$$,MC$$$$,MI$$$$,MT$$$$,MX$$$$,M$$EC$,MFG$$$,MFX$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.