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Analysis
IMF, ECB join forces on Germany

IMF, ECB join forces on Germany

Weidmann hits back on current account surplus

by David Marsh in Berlin

Fri 19 Jan 2018

The International Monetary Fund and the European Central Bank have joined forces in an unusual attempt to persuade Germany to adopt more Europe-orientated economic measures as part of the convoluted round of policy discussions in Berlin.

An intense round of economic debates at a joint IMF-Bundesbank conference in Frankfurt on 18 January yielded a range of recommendations for improved German investment conditions and more spending on supply-side measures to boost potential longer-term growth.

Depressingly, at a time when the kaleidoscopic world of German party politics is obsessed with itself during drawn-out discussions on forming a coalition government, there is little sign that anyone from the German political scene is paying attention.

Christine Lagarde, IMF managing director, and Benoît Coeuré, an ECB board member, both criticised Germany's long-running current account surplus of around 8% of GDP. Lagarde said it was a sign of excess savings and inefficient investment and posed a problem for world economic balance. The rise of protectionism across the world was 'not unconnected' to the accumulation of current account surpluses in key countries, she said.

Coeuré warned that Germany would have to increase efforts for risk-sharing across the euro area to forestall the risk that the ECB would need to take more extraordinary monetary policy action – highly unpopular in Germany – when the next international financial crisis strikes. 'The more able the euro zone is to absorb shocks, the less you will have to rely on the ECB.' More measures to 'share risks' across Europe – a code-word the French desire to persuade Germany to agree a euro area budget – would avoid the need to 'test the mandate' of the ECB, he said.

Jens Weidmann, Bundesbank president, rejected criticism of Germany's current account surplus, saying raising public spending to reduce it would be futile. 'Macroeconometric simulations show that a deficit-financed expansion of public investment in Germany by 1% of GDP over two years would have a very small impact on other euro area countries.'

Noting that a higher German trade surplus was partly due to 'a relatively weak euro', he said. 'The heightened trade surplus is also a reflection of the ECB's very accommodative monetary policy stance' – on which Weidmann takes a distinctly frosty view.

Reflecting on measures to strengthen the euro area's resilience, Weidmann said, 'Facing economic challenges head-on will not only prove a boon to citizens' prosperity. It will also raise the equilibrium real interest rate. And this will make the job of a central bank substantially easier, as it adds distance to the zero lower bound.'

He called for market-orientated measures to mitigate European risks. 'To tear down the walls in European capital markets by standardising national insolvency regimes is, in my view, just one particularly important step.' A common European deposit guarantee scheme could heighten confidence. But this would be dependent on cleaning up banks' bad loans. He repeated long-held calls – now being taken up by bank regulators in Basel – on ending preferential treatment of sovereign debt on banks' balance sheets. Otherwise this could lead to 'back door' mutualisation of sovereign risks. 'Credit to general governments is not risk-free, as the sovereign debt crisis reminded us in no uncertain terms. Credit to sovereigns should not be treated any differently from credit to enterprises or individuals.'

David Marsh is Chairman of OMFIF.

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