room for improvement

IMF wants some tweaks to the German economy

Eisenbahnkräne der Kirow Ardelt AG
Just a few adjustments. Source: DPA

The Germany economy has been delivering steady growth for years but faces risks, and some of them are homemade, the International Monetary Fund warned in its annual Germany report published on Thursday.

The rise in global protectionism, geopolitical uncertainty and a return of the euro crisis could trigger new financial market turbulence, hit exports and reduce investment, the IMF said, adding that a trade war could be especially damaging.

So the government should use the current economic upturn to make the economy more productive and prepare it for the future, it said. “The good short-term economic outlook gives Germany the possibility to tackle its long-term challenges more energetically,” the IMF wrote in the report.

Spend a little, wouldya?

It’s an appeal to Chancellor Angela Merkel’s government, which has been preoccupied in recent weeks with a cabinet rift over migration, to take action. Firstly, public investment isn’t as high as it could and should be, the IMF said. Berlin was being overzealous in sticking to its borrowing limits and has ample budgetary scope to hike spending.

“Germany can do both: build up financial cushions and at the same time invest more in the future,” the IMF expert for Germany, Julie Kozack, told Handelsblatt. “Germany should invest more in education and childcare and at the same time lower taxes and contributions for low and middle-income earners. That would help to prepare Germany for future challenges.”

She said German Labor Minister Hubertus Heil took a step in the right direction this week by announcing a reduction in pension contributions for low earners from 2019, a measure his center-left Social Democrats pushed through in the talks this year to form the coalition with Ms. Merkel’s conservatives. But the government’s pension policy is going in the wrong direction because it’s failing to address Germany’s central future challenge of an aging population, the IMF warned.

Innovation, innovation, innovation

Germany should be taking steps to encourage people to work longer — instead, it has enabled many employees to retire earlier by lowering the pension age to 63 for those who have paid into the system for 45 years. Given demographic change, Germany should also be boosting its weak productivity growth, for example by encouraging company startups, the IMF said.

It suggested offering tax incentives for research, a measure that is included in the government’s coalition agreement but doesn’t appear to be high up on its list of priorities. The government should also make it easier for company founders to get hold of risk capital, the IMF said.

Next, the banking sector. “The German banks must find a way to increase their weak profitability,” said Ms. Kozack. “This can be done through cutting costs, mergers or finding alternative sources of income.”

Germany also needs to keep an eye on its property market. “House prices are overvalued in some cities,” said Ms. Kozack. But there’s no cause for an alarm yet because there’s no lending boom to accompany the price boom, she added.

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin. To contact the authors: hildebrand@handelsblatt.com, greive@handelsblatt.com.

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