Surging debt and liquidity pose global risk: Schäuble
Surging levels of worldwide debt and liquidity present a massive risk to the world economy, said German Finance Minister Wolfgang Schäuble. There is also danger of "new bubbles" forming in the financial markets, said Schäuble, thanks to the trillions of dollars banks have pumped into them. JP Morgan's Marko Kolanovic warned that the world is on the brink of a "great liquidity crisis" last week.

German Finance Minister Wolfgang Schaeuble, the warhorse of the eurozone debt crisis, will attend his final meeting of eurozone ministers on Monday, October 9, 2017, as variously the most loathed or loved figures in EU politics. (Photograph: JOHN THYSJOHN THYS/AFP/Getty Images)

Wolfgang Schäuble has warned that spiralling levels of global debt and liquidity present a major risk to the world economy, in his parting shot as Germany’s finance minister.

In an interview with the Financial Times, the Europhile who has steered one of the world's largest economies for the past eight years, said there was a danger of "new bubbles" forming due to the trillions of dollars that central banks have pumped into markets.

Mr Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of non-performing loans.

A strong advocate of fiscal rectitude, Mr Schäuble dominated Europe’s policy response to the eurozone debt crisis and has been vilified in countries such as Greece as an architect of austerity.

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But he will mainly be remembered as the most ardently pro-European politician in German chancellor Angela Merkel’s cabinet, skilled at selling the benefits of the euro and of deeper European integration to an often sceptical German public.

Mr Schäuble told the FT that the Brexit vote last year had demonstrated how “foolish” it was to listen to “demagogues who say...we’re paying too much for Europe”.

“In that respect they made a great contribution to European integration,” he said. “Though in the short term that doesn’t really help Britain.”

Mr Schäuble is to move to a new job as Speaker of the German Bundestag, amid widespread concern about how the legislature will be affected by the arrival of 92 MPs from the Alternative for Germany (AfD), a rightwing populist party that stunned the country’s political establishment by winning 12.6 per cent in last month’s election.

Mr Schäuble, who will attend his last meeting of the eurogroup finance ministers on Monday, sought to reassure Germany’s allies that the AfD’s surprise success would not in any way affect the country’s commitment to liberal democracy.

“There’s no chance Germany will ever relapse into nationalism,” he said.

The AfD’s voters were dissatisfied, felt excluded, were angry about perceived injustice and worried about how the world was changing. “But there’s no reason to believe that democracy and the rule of law are in danger,” he said.

However, he warned that the world was in danger of “encouraging new bubbles to form”.

“Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too,” he said.

His comments come a day after Christine Lagarde, head of the International Monetary Fund, said the world was enjoying its best growth spurt since the start of the decade, but warned of "threats on the horizon" from "high levels of debt in many countries to rapid credit expansion in China, to excessive risk-taking in financial markets".

Mr Schäuble’s views also chime with those of the Bank for International Settlements, which has long argued that aggressive monetary easing by central banks was fuelling bubbles in asset prices.

The BIS warned last month that the world had become so used to cheap credit that higher interest rates could derail the global economic recovery.

Mr Schäuble defended austerity, saying the word was, “strictly speaking, an Anglo-Saxon way of describing a solid financial policy which doesn’t necessarily see more, or higher deficits as a good thing”.

He said Germany’s current economic boom, with rising domestic demand and investment and the lowest unemployment rate since reunification, was a vindication of an economic policy that prioritised “sticking to the rules” and avoiding deficits. Under his stewardship the country has run balanced budgets since 2014.

“The UK always made fun of Rhineland capitalism,” he said, contrasting Germany’s consensus-driven, social market model with Anglo-American free markets and deregulation. “[BUT] we have seen that the tools of the social market economy were more effective at dealing with the [FINANCIAL]crisis...than in the places where the crisis arose.”

Mr Schäuble praised Emmanuel Macron’s “vigorous initiatives” for overhauling the EU, without directly addressing the French president’s proposals for eurozone reform. He said only that the key task facing the single currency area was to “reduce the risks, which are still too high — think of the bank balance sheets in many EU member states”.

“We have to ensure that we will be resilient enough if we ever face a new economic crisis,” he added. “We won’t always have such positive economic times as we have now.”

(Copyright The Financial Times Limited 2017)