IMF crosses swords with Germany over crisis handling

The International Monetary Fund has exhorted Germany to stop dragging its feet on eurozone crisis measures, refuting claims that austerity is working and that Europe is on the road to recovery.

 The IMF said Germany’s vast trade surplus must be slashed in half to rectify the eurozone’s North-South imbalances, and warned that fiscal overkill could abort recovery and set off an EMU-wide chain reaction.

“Fiscal over-performance should be firmly avoided,” said the Fund in its annual health check on the country.

“Should growth prospects sour and labour markets weaken, proactive fiscal policies would be needed. A large shock may necessitate invoking the escape clause under the debt brake rule in order to support domestic activity and employment,” it said, referring to a clause in the German constitution mandating a cut in the structural deficit to near balance by 2016.

The IMF said Germany is barely above recession level, with growth of just 0.3pc this year followed by a Japan-style stagnation for the rest of decade with a peak growth rate of 1.3pc. The country will lag the United States by the biggest margin in modern history each year until 2018.

The two have clashed at each stage of the crisis, with the Bundesbank deriding the IMF as the “Inflation Maximising Fund” under the control of Keynesians who have overstepped their “institutional and legal” authority.

The rebukes have infuriated the IMF Board members, especially those from Asia, Latin America, which think the Fund has been doing Germany’s work for it. They grumble that the IMF has been dragged into ill-designed rescue packages, and that the lion’s share of IMF resources have been used to prop up the currency experiment of rich countries well able to clean up their own messs.

The IMF’s latest warnings came as Italy announced an eighth quarter of falling GDP. While the economy is starting to bottom, output is 8.8pc below the pre-Lehman peak and industrial production has fallen by a fifth.

Italy’s public debt ratio is spiralling upwards and may reach 133pc of GDP this year, well into the danger zone. Ulrike Rondor from Commerzbank said the budget deficit is 0.9pc of GDP higher than it was this time last year, suggesting that the country is even further away from stabilizing debt levels.

The IMF said the eurozone remains vulnerable to a host of shocks. It called on Germany to flesh out the EMU banking union and safety net, warning that worries about the banks could set off another round of contagion. “Delaying or diluting the roadmap, including a centralised resolution authority and common deposit insurance mechanisms and backstops, would preserve an unsatisfactory status quo and run the risk of destabilizing confidence again.

Berlin insists that disciplinary measures such as the `fiscal compact’ and draconian budget cuts across the EMU periphery have essentially solved the problem.

Its envoy to the IMF refuted suggestions that Germany has misread the crisis, writing “I would like to emphasize that substantial progress has already been made”. He insisted that Germany must pursue “prudent policies” and act as an “anchor of regional stability” rather than try to kick-start growth with Keynesian stimulus.

The IMF said Germany’s currency is undervalued by up to 10pc, roughly the same as China, but monetary union is jamming the correction mechanism with EMU.

The dispute with Germany is fraught with emotion because Berlin and Frankfurt have dominant control over the EMU machinery and are effectively dictating policy for the whole currency bloc.

Full article: IMF crosses swords with Germany over crisis handling (The Telegraph)

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