By Michael Nienaber and Joseph Nasr
BERLIN (Reuters) - The European Commission's call for fiscal stimulus should not be directed at Germany as Europe's biggest economy has increased investment more than the euro zone average in the last decade, Finance Minister Wolfgang Schaeuble said on Tuesday.
The commission - the executive branch of the European Union - has called for Germany and other euro zone countries to loosen overall budgets to create more growth and jobs, a plea also aimed at addressing the rise of populist parties in Europe.
Such a move would be a sharp reversal of EU policy, which has been focussed on budgetary discipline and austerity for most of the euro zone's existence.
Populist parties have fed on the resulting discontent.
Chancellor Angela Merkel's conservatives, for example, will campaign for next September's election in an increasingly fractured political landscape, in which the far-right Alternative for Germany (AfD) is likely to enter the national parliament for the first time.
"I think the EU Commission's recommendations are addressed at the wrong country," Schaeuble told the Bundestag lower house of parliament in a general budget debate, adding investment in Germany grew 3.9 percent a year between 2005 and 2015, compared with a rise of 0.7 percent in the euro zone.
Schaeuble, a veteran member of Merkel's conservatives and renowned for his fiscal hawkishness, said the government was able to increase spending thanks to low borrowing costs and rising tax revenues.
But tax revenues would slow in coming years and interest rates would not get any lower, giving Germany less fiscal room for maneuver as it plans to hike spending on defense and on tackling the causes of migration in Africa, Schaeuble warned.
Schaeuble has ruled out taking on new debt to finance more state spending. But even if Berlin decided to loosen its purse strings, its fiscal wiggle room would be limited by a strict legal framework enshrined in the German constitution.
The so-called debt brake allows the federal government to take on new debt equivalent to 0.35 percent of gross domestic product each year. According to the Finance Ministry's draft budget, this would be up to 13.2 billions euros in 2017.
Investors don't expect a major fiscal stimulus push. "I think it will have negligible impact on growth prospects for the euro zone - not an infrastructure package – just letting the budget slip a little," David Zahn from Franklin Templeton said.
The Cologne Institute for Economic Research lowered its 2017 forecast for German growth to 1.0 percent from 1.5 percent previously, citing political uncertainty after Britain's vote to leave the EU and the election of Donald Trump in the United States.
The government expects growth to slow to 1.4 percent next year from a predicted expansion rate of 1.8 percent this year which would be the strongest in half a decade.
Schaeuble urged all political parties to be as honest and realistic as possible about Germany's fiscal possibilities in the upcoming election campaign.
"The better we manage this, the less space we'll leave for those who want to weaken democracy with demagogic and populist paroles," Schaeuble said. "Realistic honesty is the best precondition to guard freedom, the rule of law and democracy... in the future."
Opposition lawmakers attacked Schaeuble's policy of keeping the budget balanced, accusing Merkel's right-left coalition with the Social Democrats (SPD) of neglecting low-wage earners and therefore contributing to the rise of the AfD.
"The AfD is a child of the grand coalition's policies," said Gesine Loetzsch, budget expert for the radical Left party. "It is time for you to realize that the austerity policy has driven Europe into a deep crisis," she added.
Sven-Christian Kindler from the opposition Greens said it was wrong to "stubbornly" stick to fiscal austerity in times of low interest rates and high youth unemployment in many euro zone countries.
"We now need measures against social inequality in this country, that's what we need now," Kindler said. "It's good news that this will be the last federal budget of this grand coalition."
Eckhardt Rehberg, budget expert for Merkel's conservatives, rejected the accusations and defended Schaeuble's balanced budget policy - also known as the "Schwarze Null" or Black Zero.
"The Schwarze Null, this means being fair to future generations," Rehberg said, adding that Germany had increased public spending on infrastructure, security and migrants.
Schaeuble also reiterated his warning of possible tax dumping, amid fears Britain may cut corporation tax.
(Additional reporting by Gernot Heller and Sabine Siebold in Berlin, Abhinav Ramnarayan in London; Editing by Madeline Chambers, Jeremy Gaunt and Hugh Lawson)