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Merkel pledges budget increases in election year

November 19, 2016

Chancellor Angela Merkel has pledged to increase investments in infrastructure and other areas without sending the budget into the red. It may signal the start of a shift in monetary and budget policy.

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Image: Reuters/H. Hanschke

German Chancellor Angela Merkel pledged on Saturday to increase the budget for infrastructure and other areas in 2017, an election year, in the days before she is expected to announce a run for a fourth term in office.

In her weekly video message, Merkel said she would increase investments in roads, railroads, broadband internet and education without "new debts at the expense of future generations."

The chancellor also said the budget would add "a good investment" to fund refugee integration to ensure their access to the workforce, as well as more money for international development aid "to tackle the root causes of those fleeing."

The arrival of some 900,000 refugees in Germany last year dented support for Merkel and created divisions within conservative ranks as concern mounted over security and integration.

In her video message, Merkel also outlined budget increases for domestic security and the military as Germany looks to play a greater role within NATO and European defense. "Security plays an important part, and that is not just the case since the election of a new president in the United States," she said, referring to president-elect Donald Trump's demands that allies share the cost of international defense.

Europe's largest economy

Germany, Europe's largest economy, has a budget surplus, and other EU members have urged it to increase spending in order to boost eurozone growth. This week, the European Commission called for a "significantly more positive fiscal stance" in the eurozone area, an idea that was shunned by Germany's conservative Finance Minister Wolfgang Schäuble.

The architect of austerity and "Schwarze Null," or balanced budget policies, Schäuble has planned a balanced budget for the next four years. The 74-year-old minister has already said that he plans to run for a seat in the Bundestag again, a signal to many that he would like to continue to play an important role in the next cabinet.

Will Merkel run for a fourth term as Chancellor?

The European Central Bank, which is set to meet next month to decide on extending quantitative easing (QE), has been looking for a way to adjust monetary policy, as the US Federal Reserve is expected to raise interest rates.

The ECB has also called on Germany to use fiscal spending to boost growth and allow for a change in monetary policy, which has so far been unable to kick-start eurozone growth.  

Trump to boost economic growth

Trump, meanwhile, has vowed to use fiscal spending to boost economic growth, arguing that monetary policy has not been effective in healing the real economy. If that works, it may influence a shift away from Germany's hard-line austerity stance. Trump's surprise victory on the back of popular discontent also sent a signal to Europe, where a rise of the right is challenging the political status quo in France, Germany and other countries.

Next year's elections in Germany are likely to bring another "grand coalition" between Merkel's conservatives and the Social Democrats. But some analysts suggest that what could really change Berlin's austerity stance would be a move of Schäuble to another ministry.

One senior German official who worked in the governing coalition told Reuters that the Social Democrats were likely to ask for control of the finance ministry as they did in 2005, instead of the foreign ministry.

"Regardless of who that partner is, everyone has understood that the finance ministry has a great deal more value than the foreign ministry," the official said.

Christian Odendahl, chief economist at the Centre for European Reform, told Reuters that there was a growing debate within Germany over the issue of maintaining Schäuble's "Schwarze Null" policies at all costs.

"If you had a different finance minister or if the political case for a topic-based fiscal expansion grew, then you could see a shift," Odendahl said. "Merkel is far too pragmatic and political to make the Schwarze Null a priority when there are other problems to address."

In a poll carried out by public broadcaster ARD in September, 58 percent of the electorate supported spending additional tax revenue on infrastructure, while only 22 percent favored debt reduction and 16 percent called for tax cuts.

The German parliament is to debate the budget next week.

cw/jm (dpa, KNA, Reuters)