Transcript of a Conference Call on Germany with Juha Kahkonen, Deputy Director of the IMF’s European Department and Conny Lotze, Deputy Chief of Media Relations

IMF News, July 12, 2011

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Canonical URL: Transcript of a Conference Call on Germany with Juha Kahkonen, Deputy Director of the IMF’s European Department and Conny Lotze, Deputy Chief of Media Relations

The German economy "grew 3 1/2 percent last year" and the IMF team is "expecting growth of 3.2 percent this year."
The IMF assessment: Germany "has recovered all the employment and output losses from the global financial crisis."
Medium-term potential growth remains constrained: potential growth "still at about 1 1/4 percent."
Key policy objective: raise medium-term growth so "domestic demand contribute[s] more than until now to growth" to reduce dependency on exports and lift Germany’s role as a locomotive for Europe and the global economy.

Growth drivers identified: labor, investment, and productivity.
Labor
- Demographics: "the working-age population is peaking this year and next and there will be a gradual but significant decline in the working-age population."
- Opportunity: raise labor-force participation to levels "that exist currently in the Nordic countries" to counteract demographic decline.
Investment
- Diagnosis: "Germany's problem is not savings that are out of line, but it's actually investment rates that are low by advanced country standards."
- Policy aim: implement measures to raise the investment rate; increased labor-force participation would also "increase the incentives to invest."
Productivity and innovation
- Constraint: difficulties "getting ideas to the marketplace and implementing them."
- Specific gaps: limited availability of venture capital, obstacles in moving university ideas to market, and weaknesses in insolvency regime affecting creative reallocation.

Tax policy
- Aim: "increase labor-force participation and raise the investment rate."
- Approach: not in favor of generalized tax relief; instead, "targeting groups where the potential for higher participation rates is the greatest" — specifically "women, lower-income groups, and the elderly."
- Corporate taxation: "advocate further easing of corporate taxes to help stimulate investment."
Education
- Strengthen "early childhood care and education."
- Reinforce Germany's vocational training system and support "lifelong learning so that skills would remain up to date through people's careers."
Innovation
- Broaden access to venture capital outside traditional banking channels.
- Improve mechanisms for universities to commercialize ideas.
- Improve the insolvency regime to facilitate reallocation of resources.

Overall: the German financial system is "broadly stable but there are pockets of vulnerability."
Systemic features and vulnerabilities:
- Improved capital ratios imply capacity to "absorb considerable stress."
- Remaining concerns: banks are "highly leveraged, have low profitability and the large banks remain highly dependent on market funding."
- Specific institutions: vulnerabilities "apply in particular to certain financial institutions, most prominently some Landesbanken."
- Transparency: recommend "earlier publication of data and improving transparency."

Legacy distress
- Carve out viable segments from distressed banks and return them to private hands.
- Sell distressed assets "at a deliberate pace avoiding fire sales."
Regulatory and supervisory clarity
- Implement the discussed "Ten-Point Plan" that would move supervision more to the Bundesbank and make it responsible for macroprudential oversight.
Deposit insurance
- Move toward unifying the "individual deposit insurance schemes for each pillar of the banking system" to "realize economies of scale."
Savings banks (Sparkassen)
- Caution against complacency despite good crisis performance.
- Over time, consider shifting savings banks "gradually to private ownership while making sure that their public functions are carved out," noting close connections between Sparkassen and Landesbanken and increasing international competition.

Germany as a large investor: foreign assets "are highly concentrated in the Euro Area where there's a gross exposure of almost 120 percent of GDP."
Direct exposure to distressed periphery countries:
- Exposure to Greece, Ireland, and Portugal: "only about 4 percent of German GDP or about 1 1/2 percent of German banking system assets."
- Exposures to Spain and Italy are noted as larger (specific numbers not provided in the call).
Assessment: "The numbers here show that the direct impact of contagion from the three countries is small" but broader distress could lead to larger impacts.

Growth forecast revision: upward revision for the year reflects "the first quarter growth number for this year was a positive surprise" rather than a change in underlying trend.
Stress tests: IMF is "not privy to the results of the European stress tests" and will await their publication; FSAP suggested "overall the system is quite strong, but there are pockets of vulnerability."
Timing of related Article IV staff reports:
- Italy's report "should be coming out fairly soon. It could be even today."
- Spain "is only in the Board for discussion next week, so it's going to take another week or a little bit longer."
Upcoming coverage: "The Euro Area Article IV will also be in the Board" next week.

Transcript of a Conference Call on Germany, July 12, 2011, Washington, D.C.