CAPE TOWN (Reuters) – Germany’s incoming government must address the economy’s structural faults quickly and should reform fiscal rules to allow for greater investment in Europe’s largest economy, Bundesbank President Joachim Nagel said on Wednesday.
Germany’s economy contracted for the past two years and will stagnate at best in 2025 as its vast manufacturing sector is in recession, households are saving up cash instead of consuming and the government is spending far less than its relatively low debt levels would allow.
“Time is of the essence,” Nagel told Reuters in Cape Town, on the sidelines of a meeting of G20 finance chiefs. “It is important that the new government acts quickly. Our structural problems must be addressed to improve Germany’s competitiveness.”
The conservative CDU/CSU bloc won Sunday’s election by a wide margin and chancellor-in-waiting Friedrich Merz said he was keen to form a government quickly to revive a moribund economy.
That will still require him to form a coalition and he was most likely to team up with outgoing Chancellor Olaf Scholz’s Social Democrats (SPD).
Merz, however, ruled out a quick reform of Germany’s constitutionally enshrined debt brake, which limits public borrowing and has weighed on the government’s ability to invest.
Nagel said the Bundesbank would do its part by tabling a proposal to reform the rules while maintaining fiscal stability.
“We will publish our proposal shortly; it will be a comprehensive paper,” Nagel said, adding that there is scope to increase net borrowing within EU rules to enable more investment.
While the combined debt of the 20 euro zone countries is around 88% of GDP, Germany was at 62%, one of the lowest among the world’s largest economies and about half of the level of the United States.
“More growth is needed,” Nagel said.
(Reporting by Christian Kraemer; writing by Balazs Koranyi; Editing by Nick Zieminski)
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