May 14, 2018 / 11:07 AM / 9 days ago

IMF presses German government to invest more to reduce trade surplus

BERLIN (Reuters) - The International Monetary Fund on Monday stepped up pressure on Chancellor Angela Merkel’s government to help reduce Germany’s high trade surplus by further increasing its public investment.

A man walks past the International Monetary Fund (IMF) logo at its headquarters in Washington, U.S., May 10, 2018. REUTERS/Yuri Gripas

Germany should also consider pension reforms to lengthen working lives, mitigating the need for workers to save so much for retirement and lower the risks of old-age poverty, the Fund said.

The IMF and the European Commission have long urged Germany to boost domestic demand by lifting wages and investment to reduce what they call global economic imbalances. Since his election, U.S. President Donald Trump has also repeatedly criticised Germany’s export strength.

The IMF said boosting productivity growth and investment would raise Germany’s long-term growth potential and reduce its “persistently large current account surplus” - the broadest measure of goods, services and investment flowing into and out of the country.

“The new government’s coalition agreement contains several welcome measures which will continue to address some of these challenges,” the IMF said in its annual policy recommendations.

“Yet the current favourable economic environment provides an opportunity for the new government to take more forceful policy actions,” the IMF added.

French President Emmanuel Macron gave a speech in Germany last week in which he urged it to wean itself off the “fetish” of fiscal conservatism if it wants to become a leading force for European renewal.

In January, IMF chief Christine Lagarde warned that ballooning current account surpluses in countries such as Germany were partly responsible for the rise of protectionism elsewhere.

In its recommendations, the IMF said Germany should use the “ample available space within the fiscal rules” to further increase public investment in infrastructure and education.

INVEST WHILE ECONOMY STRONG

Asked if Finance Minister Olaf Scholz should ditch his predecessor’s goal of a “black zero” budget that incurs no new debt and instead issue at least some new bonds to boost investment, IMF economist Julie Kozack said prudent fiscal policy was important.

But she added: “It’s also important to use the opportunity today when the economy is strong and good to invest for the future.”

Germany’s constitutionally enshrined debt brake would allow the federal government to take on new debt to a limited extent of up to 10 billion euros ($12 billion) per year.

But Scholz, from the left-leaning Social Democrats, has decided to continue the cautious policy stance of his conservative predecessor, Wolfgang Schaeuble, and finance any additional public spending through tax revenues alone.

Scholz said last week that he wanted to use higher-than-expected tax revenues to hike investments in digitalisation by 2.4 billion euros this year.

“We now have the opportunity to get started with a stronger offensive regarding our country’s broadband infrastructure and connecting our schools to the grid,” Scholz said on Monday.

The German economy is expanding for the ninth year in a row, and the government has kept a balanced budget since 2014.

The IMF said GDP growth had accelerated in 2017 as exports rebounded and investment picked up after a prolonged soft patch.

While the short-term outlook is for robust growth, the IMF also pointed to risks.

“A rise in protectionism, geopolitical uncertainty, or a stalled reform agenda in the euro area may negatively affect export prospects, weigh on investment, and rekindle financial stress,” it added.

The IMF will revisit its 2018 growth forecast for Germany of 2.5 percent if the risk of protectionism materializes, Kozack said.

Reporting by Michael Nienaber; Editing by Paul Carrel and Hugh Lawson

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