Thursday

27th Jun 2019

IMF tells Germany to do more for eurozone

  • Germany should do more, says the IMF (Photo: PeterXIII)

Germany's economy is doing well in its recovery, but the country should be more "active" in helping the rest of the eurozone cope with the crisis, the International Monetary Fund has said.

"As the euro area’s largest economy, Germany can play a pivotal role in addressing the challenges posed by the crisis. Articulating more clearly the Economic and Monetary Union’s shared vision of an appropriate post-crisis architecture will help in restoring market confidence," the Washington-based body said in a country report published on Tuesday (8 May).

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As exports are picking up again, "the conditions are in place in Germany for a domestic demand-led recovery," driven by consumption and investment.

The IMF also said that the EU's economic powerhouse should allow for its workers to get higher wages. This is in line with France and other southern countries' criticism about Germany's well-performing economy: That it keeps its wages low to boost production and exports, at the expense of less "competitive" euro-states.

"Looking ahead, a pickup in wages and some asset prices would be part of the natural process of rebalancing the sources of growth. Allowing these developments to proceed, while adhering to Germany’s macroeconomic policy framework, will also help to appropriately further reduce Germany’s high current account surplus," the IMF suggested - with German finance minister Wolfgang Schauble recently indicating he is open to a hike in the country's wages.

An intensification of the euro-crisis would hurt Germany as well, as it would "spill over directly through real and financial channels and indirectly through dampened business and consumer sentiment."

So while southern states are implementing harsh austerity measures, which the IMF refers to as "ambitious structural reform agendas", Germany should rebalance its economy to alleviate some of the "imbalances in the euro area."

The international lender suggests Berlin should accept a somewhat higher inflation rate to be pursued by the European Central Bank, which would help the "periphery economies" - meaning Spain, Italy, Greece, Portugal, Ireland - get out of recession.

Meanwhile, Fitch ratings agency said that Germany's stake in the eurozone is so high that even a Greek exit would not derail the single currency.

"A Greek exit does not mean the end of the euro. Germany above all has a fundamental interest to keep the common currency," Paul Taylor, head of Fitch, told Spiegel magazine in an interview published Tuesday.

"If the deutschmark were reintroduced, it would appreciate considerably against other currencies. Export industries, which are the motor of the German economy, would suffer. Germany isn't going to tolerate that, even if one or more countries leave the eurozone," he explained.

His comments came as Greek politicians were struggling to form a leftist government opposing the terms of a €130 billion bail-out agreed earlier this year, following Sunday's elections.

German and EU officials have warned that the austerity programme linked to the bail-out is non-negotiable, raising again the prospect of a Greek exit from the euro.

IMF: eurozone at centre of coming storm

IMF chief Lagarde has warned of "dark clouds" on the economic horizon, adding that bail-out funds should be used to help banks to stop a credit crunch.

Europe's left-wing turn worries markets

Markets are in jitters after the victory by a Socialist president in France and a strong mandate for anti-bail-out parties in Greece have put in doubt the German-driven focus on budget discipline in Europe.

German bank breaks anti-inflation taboo

In a marked shift from its age-old taboo of accepting higher inflation, the German Bundesbank has said it may tolerate a devaluation of the common currency to help out crisis-hit countries.

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