By Vivienne Russell | 22 July 2014
The International Monetary Fund has encouraged Germany to boost public investment in transport and education projects and others that would deliver ‘true economic value’.
In its annual review of Europe’s largest economy, the IMF concluded that recovery was under way, led by domestic demands, healthy corporate and household balance sheets, a strong labour market, and a ‘much improved’ fiscal position.
In the short term, growth is set to gain momentum with output set to increase by 1.9% this year and 1.7% next year. However, growth in the medium term is set to face constraints from a weak and precarious international environment, uncertainty over energy costs and rapid demographic changes.
Therefore, IMF directors stressed the importance of growth-enhancing policies to offset these medium-term risks. These were also likely to generate ‘positive spillovers’ to the rest of the eurozone areas and maintain the role of Germany’s economy as the anchor of regional stability.
‘Directors considered that policies that focus on strengthening domestic sources of growth, promoting private investment, and reducing the current account surplus would be beneficial for both Germany and the euro are as a whole, while also facilitating external rebalancing,’ the IMF stated.
‘To this end, most directors recommended that the authorities use available space to boost public investment in projects with true economic value, especially in transport and infrastructure and education, while adhering to the European and national fiscal rules.’
Despite this, some directors stressed the importance of maintaining a safety margin and confidence in the public finances.
The review also included a warning on Germany’s intention to introduce a minimum wage. This needed to be done ‘with care’, the IMF said, warning that it could have adverse effects on employment both across sectors and regions.
However, measures to improve income redistribution, while also raising labour market participation and minimising fiscal costs, should be explored.
