Germany-2012 Article IV Consultation: Concluding Statement of the IMF Mission
May 8, 2012
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Prospects for a recovery in Germany are favorable, but the outlook is clouded by external risks, especially from stress in a number of euro area economies. The key near term policy priorities are to allow the transition to domestic demand-led growth to proceed, secure financial stability, and help address the challenges facing the euro area. The opportunity should also be seized to further strengthen the economy’s own growth potential, and actively participate in articulating more clearly the Economic and Monetary Union’s shared vision of the post-crisis architecture, which would help in restoring market confidence.
1. The conditions are in place in Germany for a domestic demand-led recovery following the downturn at end-2011. The drag from last year’s decline in external demand is receding, while domestic labor market conditions have continued to strengthen. Underpinned by healthy corporate and household balance sheets, higher wages, well anchored inflation expectations, and low borrowing costs, growth is poised to reach potential in the second half of 2012, driven by both consumption and investment.
2. The near-term outlook is, however, clouded by a number of downside risks from external sources. In our view, the main risk facing Germany is an intensification of the euro area crisis, which would spill over into Germany directly through real and financial channels, and indirectly through dampened business and consumer sentiment. Lower global growth prospects more broadly would also cloud the outlook for activity. An abrupt rise in oil prices due to geo-political shocks also remains a downside risk to the outlook.
3. The main policy priority in the near term is to allow the transition to domestic demand-led growth to proceed and to guard against the downside risks. We see the fiscal stance, with a modest structural consolidation and the full operation of automatic stabilizers, as appropriate under the baseline, given Germany’s advanced cyclical position, limited fiscal spillovers on growth in the European periphery, and Germany’s status as an EFSF/ESM guarantor. 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.
4. Securing financial stability in the face of external risks remains a key priority in our view. Despite some gradual progress achieved, the banking system remains vulnerable to external shocks given its high leverage ratios, the low quality of bank capital, significant crossborder exposures, and large reliance on wholesale funding. It will be also be important to ensure that risks from the global activities of large banks are fully understood and internalized. The mission welcomes the pre-emptive reactivation of the backstop facility for financial institutions (SoFFin II) even though banks are expected to meet EBA capital requirements without the use of public support, under the baseline. Steps to establish a framework for implementing macroprudential policies following European Union initiatives are timely, although we see no need to deploy macroprudential tools at this juncture.
5. The current environment provides a window of opportunity to build momentum in financial sector reforms in line with the IMF’s 2011 Financial Sector Assessment Program (FSAP) Update recommendations. Efforts to reduce outstanding public capital support to some banks and the sizable balance sheets of the two winding-up institutions should be stepped up, while paying due regard to minimizing potential losses to the state. Progress is also needed on a comprehensive strategy aimed at improving the efficiency and stability of the banking system. In particular, we believe greater efforts are needed in restructuring the Landesbanken and reforming their business models. In addition, the crisis management framework should be strengthened by establishing resolution plans and enhancing the deposit insurance regime.
6. 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, in our view. The positive short-run benefits of the necessary implementation of ambitious structural reform agendas in several euro area countries should be complemented with pan-European measures. These could include using EU structural funds and increasing the lending capacity of the European Investment Bank. Moreover, reduction of imbalances in the euro area would be helped by the natural rebalancing of Germany’s economy. In this context, consistent with the mandate of the European Central Bank, disinflationary pressures incipient in the periphery economies, essential for their relative price realignment, could imply inflation in Germany that is somewhat higher than the euro area average.
7. Germany should seize the opportunity to undertake its own structural reforms to further raise potential growth and diversify its sources, reinforcing reform momentum in the euro area. Higher domestically driven growth would help raise the economy’s potential above that envisaged under the baseline while generating positive outward spillovers. We welcome ongoing efforts to increase the labor force through higher participation of female and older workers and migration of skilled workers. Raising the quality of human capital will need reforms to the system of education and training. Raising productivity in the services sector would be helped by greater competition, including at the regional level in network industries such as transportation and energy.
8. We see a need to broaden the access to risk capital through structural financial reforms. Efforts should be stepped up to develop more arms-length financial intermediation as a complement to the well-established relationship-based system in Germany. Recent reform initiatives in the area of corporate and personal insolvency are welcome. The policy framework needs to be reexamined with a view to encouraging a larger investor base for risk capital. We believe that broadening the channels of financial intermediation would facilitate the allocation of resources towards innovation and new engines of growth.
9. We thank the authorities and other counterparts for their generous hospitality, candor and cooperation during our discussions.