By Andrea Shalal

WASHINGTON, (Reuters) – The U.S. Treasury kept Germany on the Monitoring List due to its problematic currency practices. It urged the incoming coalition government not to return to fiscal surpluses but to continue its bold COVID-19 spending.

Treasury reported in its semi-annual currency update that Germany had provided most of the pandemic financial support measures for households through 2021. The general deficit of the government was forecast to grow to approximately 6.8% gross domestic product.

The current account surplus of Germany grew to 7.5% over the four quarters ending June 2021, as net exports grew faster than domestic consumption. Treasury and International Monetary Fund both considered Germany’s external situation stronger than it was warranted.

“Treasury assesses that in 2020, Germany’s external position was stronger than warranted by economic fundamentals and desirable policies, with an estimated current account gap of 3.5% of GDP,” it said.

According to the report, the German government led by Angela Merkel was able to take “bold actions” as a response to COVID-19. These included the suspension of national fiscal rules that allowed for the issuance of new debt. The government also urged Olaf Scholz’s new coalition government to follow this example.

Treasury advised Germany to increase its revenue forecasting, and to address chronic spending under-execution. This led to fiscal surpluses that lasted well into the pandemic.

According to the report, “As recovery accelerates, the new German government should resist the temptation to return to fiscal surpluses. It should instead continue to use its substantial fiscal space.”

The report stated that such spending could be used to “fund structural measures to boost current activity, lower the labor tax wedge and strengthen efforts to combat global warming, incentivize investment, and encourage innovation – which would allow external rebalancing to proceed at a reasonable speed.”

The International Monetary Fund and the European Commission have for years urged Germany, Europe’s largest economy, to do more to lift domestic demand and imports as a way to reduce global economic imbalances and stimulate growth elsewhere.

Treasury reported that the bilateral surplus in goods and services between Germany and the United States rose from $63 billion to $66 billion during the quarters ending June 2021. This was a source for ongoing frustration for Trump.