MNI INTERVIEW2: Trump Set To Declare Car Tariffs On Europe

--Trump Likely To Declare EU Car Tariffs, DIW Berlin Chief Fratzscher Says

--Does Not Expect Tariffs To Be Implemented

By Luke Heighton

     BERLIN (MNI) - U.S. President Donald Trump is likely to announce trade

tariffs on Europe in May, but will probably not implement them, German Institute

for Economic Research president Marcel Fratzscher told MNI in an interview,

warning of potentially "damaging" effects for Europe's largest economy.

     Trump has threatened tariffs on European car imports if the U.S. can't

reach a trade deal with the European Union, and Fratzscher, a 10-year ECB

veteran mentioned in the German press as a potential head of the Bundesbank,

said he thought the threat would be carried out.

     "Clearly if there were a permanent tariff of 25% on cars it would be quite

damaging. It is damaging already now because it creates uncertainty, which is

part of the reason for the slowdown in investment. A slowdown in China and

Italy, the trade conflict - all these pose massive risks."

     But Fratzscher, who spoke to MNI at DIW Berlin's headquarters on March 18,

said: "Ultimately I don't think tariffs will be implemented, because at some

point Trump will realise that he's going to shoot himself in the foot. But maybe

that shows too much trust in his rational thinking."

     While Germany, with its huge export sector, would be very exposed to U.S.

moves against cars, it also has the advantage of ample fiscal room to respond to

any downward pressure on its economy.

     The low cost of 10-year Bunds means that "there is a huge negative real

interest rate. So the government could basically finance itself for free for a

long period of time," Fratzscher said, adding that generating surpluses as an

end in themselves had little economic justification.

     --SAVINGS OBSESSION

     "In Germany we have this obsession with saving, and the feeling is that the

higher the surplus, the better - as if it were a virtue. What makes that wrong

is that having debt is not a good thing or a bad thing in itself, it always

depends on what you spend the money on."

     Public investment in areas such as education, innovation and infrastructure

could produce double-digit returns, he said. "In the long-run some public

investment generates so much additional economic activity that you more than

compensate for the extra expenditure today."

     And the room for such spending may not be available forever. Factors

feeding fiscal surpluses, including record low interest rates, unusually high

corporate profits and favourable labour markets, may only be a memory in 10

years' time, Fratzscher said.

     The eurozone as a whole could do with more fiscal stimulus, in support of

European Central Bank's monetary policy, he argued.

     "Now is the time to have a smart fiscal stimulus. Smart means not spending

it on pensions alone, and not spending it on tax cuts for the rich."

     Fratzscher was cautious on another major question of the day in Germany:

that of a possible merger between banking giants Commerzbank and Deutsche Bank.

     "I am following it from the sidelines," he said, "but like most economists

I see it with a grain of doubt, whether it is really such a good idea to merge

two banks when they are both fairly weak and in need of reform. And, of course,

Commerzbank still has substantial amounts of public money in it, which also

makes one wonder whether you really want to do that."

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

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