U.S. Treasury tells new German government: Be bold, keep spending

By Andrea Shalal

WASHINGTON (Reuters) - The U.S. Treasury on Friday kept Germany on its Monitoring List for problematic currency practices and urged the incoming coalition government to keep up its "bold" COVID-19 spending rather than return to persistent fiscal surpluses.

In its semi-annual currency report, Treasury said Germany had extended most pandemic fiscal support measures for households and firms through 2021, and its general government deficit was projected to increase to about 6.8% of gross domestic product.

It said Germany's current account surplus increased to 7.5% for the four quarters through June 2021 as net exports recovered faster than domestic demand. Both Treasury and the International Monetary Fund viewed Germany's external position to be stronger than warranted.

"Treasury assesses that in 2020, Germany’s external position was stronger than warranted by economic fundamentals and desirable policies, with an estimated current account gap of 3.5% of GDP," it said.

It said the German government under Chancellor Angela Merkel took "bold measures" in response to COVID-19, including the suspension of the national fiscal rules to allow for new debt issuance, and urged the new coalition government, to be led by current Finance Minister Olaf Scholz to continue on that path.

Treasury urged Germany to improve its revenue forecasting and address "chronic spending under-execution," which led to persistent fiscal surpluses before the pandemic.

"As (the) recovery advances, the incoming German government should resist returning to fiscal surpluses and continue to deploy its substantial fiscal space," the report concluded.

It said such spending could fund "structural measures to bolster current activity, reduce the labor tax wedge, strengthen efforts to combat climate change, incentivize innovation, and reinvigorate investment - which would help external rebalancing proceed at a reasonable pace."

The International Monetary Fund and the European Commission have for years urged Germany, Europe’s largest economy, to do more to lift domestic demand and imports as a way to reduce global economic imbalances and stimulate growth elsewhere.

Germany's bilateral goods and services trade surplus with the United States, a source of ongoing frustration for former President Donald Trump, rose to $66 billion for the four quarters through June 2021, up from $63 billion in the same period in 2020, Treasury said.