German Bundesbank President Jens Weidmann. Photo: Reuters/Kai Pfaffenbach

Jens Weidmann is Merkel’s closest economic adviser as well as Bundesbank president. He strongly advised the government against tax cuts (according to a major story in Der Spiegel, Germany’s leading news outlet, in the weekend print edition) — on two grounds:

  1. Germany’s productive capacity is now “more than overstretched” so the economy doesn’t require stimulus; and
  2. The fiscal position of the German government is not nearly as strong as it seems based on a temporary budget surplus (Weidmann is looking at multi-year pension and health obligations for an aging population).

In other words, Weidmann is making a case to INCREASE saving in Germany rather than attempt to stimulate consumption.

This is a take-no-prisoners position. It has been largely ignored in the foreign media despite its Macy’s-window prominence in German media. It’s also surprising: we expected the Germans to offer a deal to their EU partners in which Germany would increase imports (by increasing domestic consumption via a tax cut) to give them leeway for structural reforms.