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Bundesbank boss Weidmann: spending no way out of crisis

Speaking in Riga on Friday at the Latvian Central Bank's annual conference, Bundesbank President Jens Weidmann praised Latvia's determination to join the Eurozone, arguing it showed that stimulus spending is not a precondition for recovery from economic crisis. 

Describing Latvia as a "lodestar" for other European countries, Weidmann launched a stern defense of Germany's conservative approach to spending.

"Various commentators have called on euro-area countries with perceived fiscal space - I guess they mean Germany without saying it - to seize the opportunity presented by low interest rates and increase investment," Weidmann said.

"Olivier Blanchard, the IMF’s Chief Economist, has argued that this would also help the euro-area periphery. He argues that in the current situation, spillover effects could be particularly high due to monetary policy being constrained by the lower bound on interest rates and the prevalence of liquidity-constrained households.

"But even if this were the case, the periphery’s share of German imports is very low, which suggests that spillovers would remain very modest in this area– all the more as the import content of public investment is especially small. The boost to the peripheral countries from an increase in German public investment is therefore likely to be rather not significant.

"What is more, the argument that Germany should seize the opportunity of low interest rates does not hold up to closer scrutiny, either. Debt totalling more than €2 trillion and the huge demographic burden Germany faces in the coming years will weigh on its growth and public finances. In that light, pursuing a balanced budget makes perfect sense for the country.

"And with the economy operating at normal capacity utilisation, Germany is not in need of fiscal stimulus either – and this will remain the case with the revised forecasts that still foresee growth in line with potential. On the contrary, in the face of coming demographic challenges, costly stimulus measures could even backfire via negative confidence effects," Weidmann told his audience.

"We should focus on shifting priorities in public expenditures. So rather than talking about a debt-financed fiscal stimulus, I would rather speak of a structural shift of government expenditures from consumption to investment. Reforming the financial arrangements between the federal, the state, and the municipality level could encourage that shift."

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