Germany should try to break its dependence on exports as the mainstay of its economic growth, argues Axel Weber, the president of the Bundesbank.
In an interview with the Financial Times, however, Mr Weber cast doubt on whether the downturn would force Europe’s largest economy to make such a structural change.
“The vulnerability of the German economy to international demand shocks is something that is not a desirable feature of any economy,” said the German central bank chief.
Signs had not yet emerged that the rapid pace of economic contraction was “levelling out”, he said, and with the eurozone economy still deteriorating, the European Central Bank could cut its main interest rate by another quarter point to 1 per cent.
However, Mr Weber opposed going below 1 per cent. Instead, once official borrowing costs had hit a floor, the ECB should send a clear signal that banks’ financing costs would remain at a low level for “some time”.
Since Lehman Brothers collapsed last year, the German economy – heavily reliant on exports, especially of machinery and equipment – has been one of the worst-affected by the global demand slump and is expected to contract by about 5 per cent this year.
Tuesday’s ZEW investor confidence survey showed a surprisingly sharp improvement in optimism, back to a level not seen since June 2007.
But Mr Weber was cautious about forecasting an early rebound. “If you are looking for ‘green shoots’, my view is that a deceleration of the downward pressures can be expected, but up to now, there are no clear signs of a levelling off in Germany and Europe.”
Bad news about German unemployment had still to feed through, he said. The Bundesbank expected a “noticeable increase” in unemployment “over the course of this year”. But this would be countered as the effects of fiscal and monetary policy stimulus started to kick in.
Compared with the UK, Germany was probably “too focused on industrial production”.
Modern manufacturing, he argued, was “not a very labour intensive process . . . A more balanced composition between services and manufacturing is desirable.”
However, he said: “I would question whether this could be engineered in this downturn.”
A further German fiscal stimulus – proposed by many economists – was not the right answer, he said. The size of measures already announced by Berlin “is usually underestimated in international discussions”.
So far, only the financial incentives offered to people trading in old cars had had immediate effect. Spending now would also have to be paid for in the future. “If the public loses its confidence in the long-run sustainability of the fiscal system, any discretionary short-term expansion of fiscal policy will have counterproductive effects.”
At the 22-strong ECB governing council, Mr Weber is one of the more conservative voices. His caution is clear when it comes to possible additional steps to boost the eurozone economy. He argued that the focus had to remain on boosting the emergency help being offered via eurozone banks – rather than circumventing the banking system to buy assets outright, as at the Bank of England and US Federal Reserve under “credit” or “quantitative easing” programmes.
German inflation would turn negative in the coming months, on the back of falling oil prices. “But this has only limited implications for medium-term inflation pressures, which I think monetary policy should look at, and it has nothing to do with deflationary forces.”
Mr Weber did not rule out asset purchases by the ECB; other council members have backed the idea of buying corporate debt. But when it came to government debt, eurozone central banks had “a very limited scope” to buy paper in secondary markets, “so in my view this is not a desirable option”.
Instead, he hinted that the ECB would extend beyond the current six-month maximum the period over which it grants banks unlimited liquidity. Once policy interest rates were at a level where they would remain “for a foreseeable time, we have to combine this rates signal with a clear signal that banks’ financing costs and conditions are going to remain as they are for some time and give refinancing security for a longer time than is currently the case”.
“The power of these two measures should not be underestimated,” he said.