IMF Report A Warning from Washington

The International Monetary Fund has picked a fresh fight with Berlin over its trade surplus, calling on Germany to invest more in infrastructure and raise wages.
The IMF and Germany don't always see eye to eye.

The name of the International Monetary Fund’s annual consultation process sounds somewhat grandiose, but if you strip down the Washington-based organization’s so-called Article IV consultations with Germany, you are left with a familiar tune, and it is far from harmonious.

Germany must invest more in infrastructure, according to IMF's report, excerpts of which were leaked to Handelsblatt last week. The country must also encourage employers to raise wages. And it should lessen the burden on its citizens by cutting income tax. In short: more give and less take.

Berlin is proud of its economy – Europe’s largest. Indeed, the health of the country’s finances was praised by the IMF. “Germany’s open and innovative economy has been performing well,” the fund concluded in its report.

But critics accuse Germany of hoarding its wealth. Only last week, Wolfgang Schäuble, the finance minister from Chancellor Angela Merkel’s Christian Democrats, forecast higher tax revenues than initially thought for 2017. The country is now projected to rake in €732.4 billion ($810.5 billion) this year, up €7.9 billion. Hardly small change found behind the sofa.

Germany’s current account surplus was the world’s largest in US dollar terms. IMF report

Central to the criticism is Germany’s massive current-account surplus. Exports outweighed imports by €270 billion in 2016, or 8.3 percent of GDP. The bulging figure has long irked Berlin’s allies as well as organizations such as the IMF and the Organization for Economic Co-operation and Development. One of Donald Trump's first policy moves after his inauguration as president of the United States was to threaten punitive tariffs on German products in a bid to redress the balance.

The IMF called the surplus “the world’s largest in dollar terms.” While Mr. Schäuble has argued the trade surplus will fall naturally over time, the IMF warned that change “would remain slow without policy action.” It suggested that boosting public and private investment “would accelerate the necessary external rebalancing process.” The fund says a surplus of between 2.5 percent and 5 percent of GDP would be more appropriate.

Highlighting the differences in opinion between Berlin and the IMF, the German finance ministry has mounted a stern defense of its policy choices, writing on its website that fiscal and economic policy in Germany aims at creating favorable conditions for a competitive economy. It says the surplus is the result of global “market-based supply and demand decisions.”

Of course, the IMF’s desire to see Germany boost its domestic demand with wage hikes and tax cuts isn’t only about improving the lives of ordinary Germans and reducing inequality. Investing in physical and digital infrastructure would enhance the country’s growth potential, according to the IMF – and would also likely benefit its weaker euro zone neighbors. More pointedly, the organization said Germany should do more to help the European Central Bank end its policy of low interest rates.

“A sustained rise in wage and price inflation in Germany is needed to help lift inflation in the euro area and facilitate the normalization of monetary policy,” the IMF said.

The federal government has delivered on its fiscal promises. First we balanced the federal budget, then we made additional funds for investments available. Wolfgang Schäuble, German Finance Minister

But the IMF’s recommendations have come as Germany’s political parties set out their stalls ahead of September’s national election. The fund, with its suggestion of tax cuts, could be seen to be overstepping the mark and interfering in the election campaign.

On paper, Social Democrat leader Martin Schulz can be happy that several of the IMF’s recommendations appear to have been taken straight from Germany’s economics ministry, led by the SPD’s Brigitte Zypries. The ministry’s 10-point plan focuses on inclusive growth and using the budget surplus for investments.

By contrast, many of the recommendations are anathema to the CDU. Mr. Schäuble has rejected criticism Germany isn’t spending enough, arguing funds for infrastructure projects have already been doubled. He has also hinted at tax cuts – but not until after the election and smaller than many even in his own party would like.

“The federal government has delivered on its fiscal promises,” Mr. Schäuble said last week. “First we balanced the federal budget, then we made additional funds for investments available.”

Mr. Schulz has campaigned heavily social justice, making it his priority when he was confirmed as party leader in March. However, if recent regional elections are anything to go by, most recently in North Rhine-Westphalia last weekend, this message has so far fallen on deaf ears.

The SPD’s defeat at the hands of Ms. Merkel's CDU in Germany’s most populous state, which it had held for most of the last 50 years, has prompted a re-think inside party headquarters. The CDU is still widely seen as the party of stability, especially when it comes to the economy.

Furthermore, one of the IMF’s key recommendations spell bad news for Mr. Schulz’s plans to roll back some of the so-called ‘Agenda 2010’ reforms introduced more than a decade ago by then-SPD chancellor Gerhard Schröder. Among other things, these reforms reduced long-term unemployment benefits in a bid to get people back to work and cut pensions, costing the SPD much of its core voter base.

But the fund argues against a reversal, saying the German labor market “continues perform to perform strongly” following the reforms, while also warning of the risks of an aging population to fiscal sustainability: “Pension reforms that make it attractive to work longer would increase old-age income, boost potential output, improve the fiscal outlook, and reduce the need to save for retirement,” the IMF said.

Perhaps the differences with Mr. Schäuble and his ministry aren’t too insurmountable after all.


Jonathan Crane is an editor with Handelsblatt Global. To contact the author: [email protected].