IMF NEWS

Port of Hamburg, Germany: the country with the biggest trade surplus in the world should invest more at home (photo: Daniel Reinhardt/Newscom)

• IMF Country Focus

Germany: Spend More At Home

July 7, 2017

Germany’s economy received yet another bill of good health, with some advice on how to keep fit, after the annual economic checkup from the IMF. Country Focus sat down with Enrica Detragiache, the outgoing mission chief for Germany, to discuss the findings.

What is the IMF's overall assessment of the German economy today?

Overall, the German economy is performing well. In fact, we have just raised our growth forecast for this year, as Germany is expected to benefit from the ongoing recovery in world trade. This growth is creating a lot of jobs and the unemployment rate is the lowest since reunification.    

The IMF’s report recommends allowing prices and wages to go up in Germany to help lift overall inflation in the euro area. How did that message resonate in a country that is historically wary of inflation?

We are of, course, not asking Germany to accept high inflation reminiscent of the distant past. We simply recommend that the country be prepared for moderately higher inflation, which would help the euro area reach the price stability objective of close to 2 percent set by the European Central Bank. Once that happens, monetary policy can be normalized and interest rates will rise, which will please German savers. Euro area inflation is currently below the ECB’s target, and has been for a few years.

Germany is the largest euro area country, accounting for 28 percent of the euro area economy, so it has a big impact on overall inflation. And whereas other countries are just at the start of their economic upswing, Germany has been growing robustly for a while and this should translate into higher inflation. The country has low unemployment and a strong economy, and so it would be normal and almost inevitable for its inflation to go above 2 percent for some time.

Unemployment is very low, as you mentioned, and the economy is strong but the IMF warns that the fraction of the population at risk of poverty is rising. Why has this happened, and how can Germany avert an increase of poverty?

				Enrica Detragiache, outgoing mission chief for Germany

If we look at the income of the less well-off and compare it to that of people in the middle of the income scale, we see that the first group—which includes older workers in certain parts of the country, single mothers, and other vulnerable people—has fallen behind. This phenomenon is a bit surprising because the economy has been doing well. There is no simple explanation: it doesn't seem to be related to having more immigrants, for instance.

Germany has many programs to address poverty and has recently taken new measures such as increased allowances for housing, children, and help to return to the labor market for the long-term unemployed. What we recommend now is to monitor whether these new measures are effective.

Germany has the world’s largest current account surplus. Germans see it as a sign of how competitive their economy is. Why does the IMF see it as a problem? In your view, what can the government do to reduce the trade surplus?

For an economy with a rapidly aging population such as Germany’s, it is normal to run a current account surplus. But not as large as the one Germany has been running for the past several years.

Having a large and persistent surplus can be bad for a couple of reasons. First, it can be part of a global problem: if some countries run large persistent surpluses it usually means that other countries are running large persistent deficits. Deficit countries risk running up excessive debt and therefore need to adjust. To help this process, it is only fair for surplus countries to adjust as well. This is particularly the case for countries that belong to a currency union.

Second, a large current account surplus can be evidence that a country is investing abroad instead of at home. This might be because the country is not very attractive to investors. In the long run, this translates into lower growth. This is why we suggest that Germany invest more, for example, in public infrastructure, where investment has declined. Better infrastructure would encourage more private investment, too.

A pension reform encouraging people to retire later in life would reduce the need to save for retirement, encouraging consumption and thus reducing the surplus. This reform would also limit the effects of aging on employment and growth.

These policies would be good both for Germany and for the rest of the world.

The German government is running a surplus to reduce its debt and maintain wiggle room in the budget. In addition to infrastructure, which you mentioned before, the IMF also proposes investment into areas such as integration of refugees, and kindergartens. Why these areas?

We are glad that Germany has followed a prudent fiscal policy: it kept its public deficits low—in fact, they had no deficit in the last three years—and reduced its public debt, which increased a lot when Germany had to rescue parts of its banking system during the crisis. But by now debt is almost back to where it was before the crisis and is projected to continue falling in the coming years. For these reasons, we think there is scope to use some resources for future growth, both on the spending and the tax side.

Public investment is one area to improve in, as I said earlier. Germany could also provide more targeted job training to the refugees, to complement other integration programs that are already in place, to ensure the refugees can find work. And we mention kindergartens and after-school programs as other areas to improve because it would encourage more women to join the workforce. These initiatives would increase economic growth, and would also help address the problem of an aging population. Finally, some of the resources could be used to reduce the taxation of labor.