As recently as the beginning of 2018, the International Monetary Fund issued one of its most upbeat economic forecasts in recent years, extolling “broad based” growth with “notable upside surprises.” Yet, the recent issue of the World Economic Outlook, published in October, projects global growth for 2019 at 3.0 percent, the weakest rate since 2009. Across the world, bond markets are sounding their loudest recessionary alarm since April 2007. Paul Krugman prognosticates a “Trump-Slump” in the coming months. Lower global trade and the investment slump cause a steep drop in manufacturing activity. A recession in a part of the euro area cannot be excluded.

This brief illustrates some of the complex current economic-policy challenges that emerged during the Autumn Meetings of the International Monetary Fund in Washington, examining their effects on the European economy. The brief will conclude by asserting that Germany will favor the approval of a fiscal “Golden Rule” at the beginning of 2020, a rule that will permit a higher public debt that in turn will allow for greater investments. The political reason for Berlin’s change of heart lies in the need for Europe to support the economy by itself, without relying too much on export. The more subtle reason is that a higher debt in the euro area would lead to the higher yields that the German public is craving and that are indispensable to keep the German financial and pension systems from collapsing.

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