(Bloomberg) -- If European Central Bank President Christine Lagarde still wants Germany to unveil a major fiscal stimulus, more unemployment there would help.
That’s the perverse reality confronting the ECB as it tries to convince Europe’s biggest economy to deliver a budget boost. Now that Germany has dodged a recession despite its industrial downturn, the nation’s politicians insist there’s no need for extra spending, suggesting that a significant fiscal push is unlikely to get traction unless the pain is more widespread.
Nagging Germany to get on board with budget stimulus is seen by investors as a necessary chore for Lagarde. She and her colleagues are confronting a slowing European economy just as stretched capacity for monetary stimulus weakens the resolves to push it much further. The mild fiscal loosening so far has mainly focused on climate-change measures.
“The support among Germans for a big stimulus wasn’t as pronounced over the last couple of months as it would have been in a similar situation in the U.K. or in the U.S.,” said Florian Hense, an economist at Berenberg. “There’s less pressure from German voters for German politicians to add to the stimulus.”
While the ECB also wants other countries to act, Germany is the prime candidate because of its economic size and the sheer amount of fiscal space its budget surpluses have created. The latest call came from Bank of France Governor Francois Villeroy de Galhau on Thursday, when he used a speech in Frankfurt to cite the ECB’s message of “effective and timely” stimulus.
Even as Villeroy spoke though, German Finance Minister Olaf Scholz was insisting in Berlin that there’s no economic crisis that would justify such a move. He and the government’s economic advisers argue that the slowdown mainly stems from external factors such as the trade war.
“Looking at the German economy, which is really resilient and globally active, you have to understand there’s slower growth in the world,” he told a Bloomberg News event in Berlin. “This has an impact on the economy in Germany. That’s obvious.”
Bottoming Out
Scholz spoke after the release of data which showed unexpected growth in the third quarter, rather than the technical recession forecast by economists. That followed a smattering of statistics which suggested the industrial sector’s weakness may be troughing.
Even if the economy had shown protracted contraction, it probably wouldn’t have been enough to provoke a change in policy. To meet the criteria of a crisis, actual job losses may need to seriously increase.
“It would take a big deterioration in the labor market to shift political incentives toward stimulus,” said Jamie Rush, chief European economist at Bloomberg Economics.
Daimler, the maker of Mercedes-Benz cars, raised the prospect of job losses on Thursday with the revelation that it wants to save more than 1 billion euros ($1.1 billion) in personnel costs by the end of 2022.
Still, Germany has “very high” levels of employment, according to Scholz. They’ve actually ticked up this year, while the jobless rate of 5% is still close to a record low.
People have grown more downbeat on expectations for pay, while there’s also been a marked increase in companies applying for the government-subsidies that allow them move staff into shortened working weeks. According to the Federal Employment Agency “it can be expected that the number of employees in Kurzarbeit for economic reasons will increase significantly in coming months.”
Still, that doesn’t mean the ranks of the unemployed are expected to swell, said Commerzbank (DE:CBKG) Chief Economist Joerg Kraemer.
“The labor market will remain stable,” he said. “Fundamentally we have a lack of skilled workers due to demographics in Germany.”
For the ECB, it’s an uncomfortable reality that it will probably take job losses to crystallize its preferred economic policy for the region’s most significant member. That prospect would only complicate a difficult relationship with the country that the Frankfurt-based institution calls home.
The day unemployment starts rising, “at that point, Germany will be willing to spend more money,” said Anatoli Annenkov, economist at Societe Generale (PA:SOGN).