IMF: Germany must 'recalibrate' if economy slows

6th August 2013, Comments 0 comments

The International Monetary Fund said on Tuesday that Germany will have to "recalibrate" its fiscal policies if growth falters in Europe's biggest economy.

The IMF maintained its outlook for 0.3 percent GDP growth this year in Germany and 1.3 percent in 2014, but said Berlin will have to rethink its tax-and-spend plans if growth falls short.

The Washington-based fund pointed to the crucial role of the German economy, warning that a "significantly weaker German outlook would in turn affect both regional and global growth prospects".

At the same time, said the Fund's German mission chief Subir Lall, "uncertainty about euro area prospects and policies, more so than about Germany itself, is holding back more robust growth in Germany".

Germany's export-driven economy shrank in the last quarter of 2012 amid the eurozone debt and recession crisis but has since gradually rebounded, booking 0.1 percent growth in the first quarter.

Chancellor Angela Merkel, who faces elections on September 22, has pushed for austerity in crisis-hit nations of the 17-member eurozone and fiscal consolidation at home to drive down public debt.

But the IMF warned Germany against tightening the purse strings too much and snuffing out growth, saying it "encouraged a recalibration of policy should growth fall short of expectations".

It said in that case slashing spending or "fiscal over-performance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment".

Lall said that lower growth would force a rethink about "whether additional domestic demand support needs to be provided".

The IMF report commended Berlin for prudent economic policies and providing "an important anchor of regional stability".

But it warned that, "given its high degree of trade openness, Germany is highly susceptible to a slowdown in external demand and/or elevated financial stress".

For Germany, it said, "the outlook for the remainder of 2013 and next year is heavily dependent on a gradual recovery in the rest of the euro area and a sustained reduction in uncertainty".

It said that Germany and the wider eurozone could either lift each other up or drag each other down, warning of "interrelated and mutually reinforcing downside risks".

In the longer term, the IMF urged Germany to push forward the EU's plans for a banking union and greater policy integration within the economic and monetary union.

It said "a clearly communicated longer-term vision for closer economic and financial integration among ... member countries would provide a crucial anchor to the expectations of households, firms and the financial system."


© 2013 AFP

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