Germany Rules Out Economic Shift Amid Pressure From Trump -- Update
22 March 2018 - 1:02AM
Dow Jones News
By Andrea Thomas
Germany's new finance minister ruled out a shift in fiscal
policy that would help Europe's largest economy reduce its yawning
trade surplus with the rest of the world, closing a possible avenue
to resolve the unfolding trade conflict with the U.S.
Speaking on his flight back from a meeting of Group of 20
finance ministers and central bankers in Argentina, Olaf Scholz
told The Wall Street Journal that even though public coffers were
full, the government wouldn't consider large income and corporate
tax cuts that could spur domestic demand and reduce the economy's
dependence on exports.
"As German finance minister and as a Social Democrat, I want
solid public finances and a good framework for business," Mr.
Scholz said in his first interview with a non-German publication
since taking office last week.
Together with China, Germany has become a favorite punching bag
for the U.S. administration because of its large trade surplus,
which President Donald Trump sees as evidence of the kind of unfair
trade practices that for decades have put U.S. exporters at a
disadvantage.
Germany would be among the hardest hit in Europe by the steel
and aluminum tariffs that the U.S. is set to start levying this
week. And Mr. Trump has repeatedly threatened to slap German cars
with punitive import tariffs of up to 25% -- 10 times their current
level.
But impatience with Germany's export-oriented economic model
goes back further than Mr. Trump's election. For years, successive
U.S. governments, the International Monetary Fund, the European
Commission, and other international organizations have urged Berlin
to loosen its fiscal policy to stimulate demand, boost imports, and
reduce its trade surplus -- currently the world's second-largest
behind China's.
Berlin, in turn, has argued that such recommendations would have
little impact on a surplus that reflects the competitiveness of its
manufacturing sector and the exchange rate of a currency -- the
euro -- over which it has no influence.
The appointment of Mr. Scholz, the first Social Democrat to
occupy the finance ministry since 2009, had raised hopes in
Brussels and neighboring European countries about a change of tone
in Berlin. But the minister, who is also deputy to Chancellor
Angela Merkel, made it clear Berlin's fiscal policy would largely
continue as in the past four years.
Even though Germany has among the highest combination of income
and payroll taxes in the world, a modest tax relief worth EUR10
billion ($12.2 billion) a year starting in 2021 would be the only
such tax cut before the next general election in 2021, he said.
"It's clear to me that our next big task will be to develop a
fairer, more balanced tax system," Mr. Scholz said. But this
reform, which would include further relief for lower incomes and
possibly tax rises for the rich "will be a task for the next
parliament."
Corporate tax cuts, he added, "are currently not on the
agenda."
The rejection of tax cuts goes against recommendations by the
government's own Council of Economic Advisers, who said this week
Germany's average income-tax rate had reached its highest level in
a generation and was set to rise further this year just as the
country's overall budget surplus continues to widen from 1.1% to
1.4% of GDP.
Mr. Scholz welcomed the fact that Washington and the European
Commission, lead trade negotiator for the entire bloc, were in
talks over seeking an exemption from Mr. Trump's steel and aluminum
tariffs and warned a full-blown trade war would "lead to a
situation where no one benefits."
But he offered no measure that would help reduce Germany's vast
trade surplus with the U.S.
Reiterating a longstanding German position, he said the surplus
reflected the strength of Germany's myriad export-oriented small
and midsize manufacturers, known collectively as the Mittelstand,
suggesting others should copy this model.
"Nobody ever criticized us for having a highly performing and
competitive economy," Mr. Scholz said. "Like everyone else, we wish
others all around the world would manage to establish such growing
and highly productive economies."
The new Merkel government has also shut down a possible avenue
raised by Washington that could secure Europe exemption from the
metal import tariffs: a sharp increase in military spending. Berlin
plans a steady but modest increase in its defense budget over the
next four years that will leave the country far below the North
Atlantic Treaty Organization target of 2% of gross domestic
product.
Returning to the question of tariffs, Mr. Scholz turned the
table on Washington, recalling that Mr. Trump had suspended talks
on the Transatlantic Trade and Investment Partnership with Europe,
which would have included substantial and mutual tariff cuts.
"Not too long ago, [the U.S. and Europe] were having a debate
about free trade, and it wasn't the Europeans who put an end to
these talks," Mr. Scholz said. "We were also talking about tariffs.
Perhaps that conversation could be a foundation for today's
talks."
Write to Andrea Thomas at andrea.thomas@wsj.com
(END) Dow Jones Newswires
March 21, 2018 09:47 ET (13:47 GMT)
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