IMF urges government to loosen purse strings

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January 18, 2018 7:16 PM

IMF chief Christine Lagarde has joined calls on Germany to invest in future economic growth even at the cost of relaxing its cherished budgetary discipline, raising hackles in Europe's powerhouse.

IMF chief

"There is an excess of savings over investments which suggests that Germany can afford to spend and invest more" Lagarde said at a Thursday conference with top economists and policymakers from around Europe hosted in Frankfurt by the IMF and the Bundesbank, Germany's central bank.

Increasing investments "will help to reduce global imbalances which we're concerned" about at the IMF.

Chancellor Angela Merkel's conservative-led governments have pursued the "black zero" policy, which calls for paying down old debts and avoiding creating new ones.

Proponents argue Germany must put its financial house in order to meet EU rules and brace itself for a looming demographic transition, which will see the economy transformed as millions born during the postwar baby boom head into retirement.

However there have long been grumbles from Germany's partners in the eurozone about Berlin's trade and budget surpluses and there have been regular calls for Berlin to step up spending to boost growth throughout the region.

Frosty reception from Bundesbank

Lagarde's advice met with a frosty reception from Bundesbank chief Jens Weidmann, who argued Germany should "maintain a safety margin to the existing fiscal rules (on debts and deficits) in the face of the looming democratic challenges" in his speech to the conference.

Investments and other measures to boost potential growth "require a shift in public expenditure from consumption to investment, rather than increased spending," he insisted.

"This may not be the most attractive thing to do. But it would be the right thing to do," Weidmann added.

Germany's Finance Minister Peter Altmaier, speaking in Paris, said that Germany had in fact spent more than planned during the past four years.

But increasing investments now could mean "higher growth in the long term will improve prosperity, helping to offset the costs of an aging society," Lagarde wrote in a blog post ahead of the conference.

Lagarde, a former French finance minister, also urged Germany to stoke wage growth to help boost inflation in the 19-nation euro area.

"We have also advised the government to spend more on reforms that help women go back to work, such as opening more childcare centres and kindergartens," as well as "creating training programmes for refugees", she added.

Berlin should spend budget surpluses "to invest more in public infrastructure, such as roads, railways and digital infrastructure," she also wrote.

The question of public spending and investment was a key source of friction between Merkel's conservative Christian Democrats and the leftist Social Democrats which reached a preliminary deal on forming a coalition government, but which now have to hammer out the details.

The Social Democrats have called for stepping up investment in infrastructure and government spending on programmes for the middle and lower classes, while Merkel's conservatives have argued that Germany can't afford to loosen the purse strings.

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