IMF: Germany should strengthen the foundations of economic success

The International Monetary Fund (IMF) believes that Germany should use its currently favourable cyclical position to undertake reforms. The preliminary conclusions reached by an IMF delegation visiting Germany as part of the "Article IV consultations" note that "[it] is a good time to look at the future and strengthen the foundations of continued economic success and financial stability". The views expressed in the statement are those of the IMF Staff and do not necessarily represent the views of the IMF's Executive Board.

The IMF’s experts expect the upturn in Germany to continue in 2015, with growth being driven mainly by private consumption, underpinned by a strong increase in disposable income. Moreover, they also believe that net exports will support the momentum of German growth.

IMF economists believe that German growth could potentially be higher than forecast if the transmission of lower energy prices or the ECB’s bond purchases to growth proves more powerful than expected. However, major downside risks to growth could include potentially weaker growth in Germany’s trading partners or, to quote the conclusions, "renewed stress in the euro area triggered by policy uncertainty or faltering reforms in some countries."

Criticism of high current account surpluses

In the preliminary conclusions, the IMF’s experts were critical of Germany’s already-high current account surplus, asserting that falling energy prices and exchange rate depreciation would boost it even further. It is regarded by the delegation as a source of concern since demand in advanced economies is still weak even in spite of ultra-expansionary monetary policies.

At the IMF/World Bank Spring Meetings in Washington, DC in mid-April, Bundesbank President Jens Weidmann rejected proposals to take economic policy measures to reduce the current account surplus. Mr Weidmann noted at the time that German enterprises were very well positioned in the global sales markets and thus accordingly successful, and that the export surpluses were the outcome of countless, mostly private sector and free decisions taken by enterprises and consumers at home and abroad.

Policy recommendations

In the preliminary conclusions of the Article IV consultations, the IMF's economists prescribe key policy recommendations for Germany. They see even greater leeway for public investment within the scope of current fiscal rules.

Moreover, they feel that Germany should reduce disincentives for women to work full-time in order to mitigate the adverse effects of a fall in the labour supply. Examples given by IMF staff include the currently high marginal tax burden faced by secondary earners, as well as the current undersupply of child care services and after-school programmes in Germany.

Greater competition, in the opinion of the IMF economists, could make the services sector more dynamic. Unlike in the strong manufacturing sector, productivity growth in services has remained sluggish.

In order to prevent future real estate market bubbles, the preliminary conclusions propose introducing additional macroprudential toolkit instruments in the area of mortgage lending. Examples include loan-to-value or debt-service-to-income ceilings.

Article IV consultations

The IMF conducts consultations with its member countries annually, the underlying principles of which are codified in Article IV of the IMF Articles of Agreement. Together with the Federal Ministry of Finance, the Bundesbank exercises Germany’s rights and responsibilities in the IMF. It cooperates with the IMF in the Fund’s surveillance of Germany’s economic and fiscal policy through the Article IV consultations. At the end of the Article IV consultation process, the staff report, following management approval, is submitted to the IMF Executive Board for discussion.