Thursday 9 October 2014 9:24 pm

Christine Lagarde and Mario Draghi call for German fiscal stimulus to avoid recession

Chris Papadopoullos was City A.M.'s economics reporter until February 2016. He is an economist at OMFIF.

International Monetary Fund (IMF) boss Christine Lagarde took aim at German policy makers yesterday, suggesting that the Eurozone’s biggest economy must use fiscal stimulus to stave off recession. “We’re not suggesting that the Eurozone is heading toward recession, but we’re saying there is a serious risk that happens if nothing is done. But we are saying also that if the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable,” said Lagarde, who has also placed pressure on France to cut its deficit. Meanwhile yesterday European Central Bank (ECB) boss Mario Draghi defended his record and also seemed to echo Lagarde’s call for assistance from Germany. “For governments that have fiscal space, then of course it makes sense to use it. You decide to which country this sentence applies,” Draghi said. Germany is in a relatively healthy fiscal position compared to most of its euro area peers, yet the powerhouse economy has recently stalled. German exports plunged in August by their largest amount since the height of the financial crisis, according to figures released yesterday. Leading institutes slashed their forecasts for growth, fuelling a debate on whether Berlin is doing enough to prop up Europe’s economy. Exports slumped by 5.8 per cent, the biggest drop since January 2009, in the latest sign that Europe’s largest economy is faltering amid broader Eurozone weakness and crises abroad that have battered confidence and led German firms to postpone investment plans. “The economy seems to need a small miracle in September to avoid a recession in the third quarter,” said Carsten Brzeski, an economist at ING. The Federal Statistics Office said late-falling summer vacations in some German states had contributed to a fall in both exports and imports, but the figures still painted a gloomy picture for an economy that until recently was hailed in Berlin as Europe’s “growth locomotive”.