Germany offers the global economy a glitter of hope

Copyright © HT Digital Streams Limit all rights reserved. Desmond Lachman, Barrons 3 min Read 02 Apr 2025, 10:22 am Ist commuters in Stuttgart, Germany. Incoming Chancellor Friedrich Merz plans to reform the country’s debt. In summary efforts to reform German debt, the country can turn into the locomotive of European growth again, writes Desmond Lachman in a gas commentary. About the author: American Enterprise Institute Senior Fellow Desmond Lachman was a deputy director in the International Monetary Fund’s policy development and review division and the main economic strategist of the rising market at Salomon Smith Barney. Problems have come to the German economy, not so single spies, but in battalions. First, it was the Covid-19 pandemic. Then it was a great energy shock caused by natural gas and oil supplies of the Russia Akraine War, followed by a sudden slowdown in the Chinese economy, which is a major export market for German capital goods. Now Germany is facing the threat of US import tariffs to combat its large trade surplus. Unlike the US, which responded to its Covid-induced, two-month Blip of a recession with the largest peacetime budget stimulus on record, Germany-to now worked to respond to its range of shocks through its so-called debt. The brake is a rule set in 2009 that limits the German public debt to 60% of gross domestic product, one of the conditions known as the Maastricht criteria to one of the founding treaties of the European Union. The brake limited Germany’s budget deficit to a maximum of 0.35% of GDP, with exceptions in times of economic emergencies. This spending restriction has prevented Germany from taking a powerful budget response on the shocks on the supply side of recent years. The net result is that Germany was from the European economy locomotive to the sick man of Europe. While the US economy has grown by about 12% since the Covid-19 pandemic, the German economy is barely above its pre-covetous level. Germany has attracted a recession over the past two years, while recovering in the US and elsewhere has driven the global economy to 3.3% growth in 2023 and 3.2% in 2024, according to the International Monetary Fund. No more. The Bundestag’s decision last month to fundamentally reform the debt must enable Germany to provide a much -needed fiscal stimulus to both the German and European economies. It should also enable Germany to address its infrastructure and investment deficiency, as well as to reduce its large surplus on the current account, which was a major cause of trade friction with the United States. Incoming Chancellor Friedrich Merz, leader of the Center-Right Christian Democratic Union Party, designed the reform to the debt. It now offers Germany the ability to start its economy with a large budget stimulus. The reform is exempt from the debt drive of all defensive spending above 1% of GDP and by setting up a 500 billion Euro fund for infrastructure improvement over the next twelve years. Merz had little alternative. President Donald Trump’s 20% import tariff on China has recently further delayed the already stationary Chinese economy-a news for Germany, which exports nearly $ 100 billion worth of goods annually. Additional so -called reciprocal rates expected from the administration this week could contribute to the economic problems. Fortunately, with a government debt ratio of about 63% of GDP, Germany has been a large fiscal room for some time to have a meaningful budget deficit for some time without concerning issues of guilt sustainability. Germany can again serve as the locomotive for the rest of the European economy. In turn, it should provide some relief for the French and Italian economies, which currently have higher public debt to GDP ratios than they did at the time of the 2010 debt crisis in the 2010 eurozone and it seems they do not have the political will to address their imbalances in the public sector. Removal of Germany’s debt also provides a glimpse into the hope that it can reduce trade tensions with the US by stimulating investment and reducing national savings through an expanding fiscal policy, Germany can make it plausible to reduce its part to reduce its large operating account. It can also argue that he is doing its part to weaken the dollar by reducing pressure on the European central bank to lower interest rates to support European economic recovery. Germany’s turnaround-by-turn alone cannot get the world out of the current economic mess in which it now finds. In order to do this, the Trump administration will have to return its current policy of aggressive import tariff increases and massive tax cuts – and show some international economic leadership. Guest commentary like this was written by writers outside the Barron’s news room. This reflects the perspective and opinions of the authors. Submit feedback and comments to [email protected]. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Global Economy Mint Specials