Three German Economic Challenges with European Effect

IMF Blog, January 17, 2018

Source details

Author: Christine Lagarde
Date: January 17, 2018
Context: Bright economic outlook for Germany with record-low unemployment and strong GDP growth; IMF and Deutsche Bundesbank hosting a conference on January 18 titled “Germany—Current Economic Policy Debates.”
Central message: Policymakers have a unique opportunity to address three key challenges—wage growth, public spending choices amid an aging society, and the large current account surplus—with implications for Germany and the euro area.

Findings

Earnings are "still growing pretty slowly" despite record-low unemployment and strong GDP growth.
Subdued wage growth was long attributed to labor market reforms of the early 2000s and to post-global financial crisis wage restraint to preserve jobs.
The economy is "operating above capacity."

Policy implications / recommendations

The current stronger economy is an opportunity to address subdued wage growth to increase spending power and support economic growth.
Faster wage growth in Germany would help lift euro area inflation toward the European Central Bank’s inflation target and benefit European peers.
Important questions: whether a German wage acceleration will soon occur, or whether adjustment will be delayed or held back by fundamental factors; and related policy responses.

Findings

Germany’s fiscal position is healthy: the public debt ratio is falling rapidly and the government is posting budget surpluses.
Key trade-off: use surpluses now to support long-term growth versus save for future pension and health-care costs as population aging accelerates.

Policy implications / recommendations

IMF view: There is a particularly strong case to use head room in the budget (including beyond the “black zero”, namely the balanced federal budget) to invest more in public infrastructure—roads, railways, and digital infrastructure.
Advise spending more on reforms that help women return to work, such as opening more childcare centers and kindergartens.
Rationale: Higher long-term growth will improve prosperity and help offset the costs of an aging society.

Findings

Germany has a high current account surplus—"nearly 8 percent of GDP"—and it is the highest in the world in dollar terms.
The high surplus reflects a preference by German households and companies to save rather than invest.

Policy implications / recommendations

IMF assessment: the surplus is too large even considering retirement-saving needs in an aging society.
Policies to boost investment domestically and reduce the need to save for retirement—such as encouraging older workers to remain in the labor force—can lower the surplus.
Need to investigate why households and companies save so much and invest so little, and implement policies to resolve that tension.

Findings

The euro area outlook is also favorable; IMF projects strong growth for the 19-member group over the next couple of years.
Ensuring sustained growth requires completion of key elements of the euro area’s economic architecture.

Policy implications / recommendations

Germany’s support is essential for euro-area reforms. The preliminary coalition agreement "correctly recognizes the centrality of these issues."
IMF calls:
- Complete the banking union with greater risk sharing.
- Build a central fiscal capacity to provide a cushion in bad times.
- Advance the capital markets union to add private cross-border risk sharing.
Complementary national actions:
- Countries with high debt levels should rebuild budgetary buffers.
- All countries should implement policies to increase productivity, which has largely stagnated since the end of the global financial crisis.

Closing metaphor

"The time to repair the roof is when the sun is shining." The IMF urges using the current favorable economic conditions in Germany and the euro area to implement reforms and investments.

Source: Three German Economic Challenges with European Effect — Christine Lagarde, January 17, 2018.