Germany’s fiscal and financial self-destructive policies

International Monetary Fund Managing Director Christine Lagarde (R) speaks the German Finance Minister Wolfgang Schäuble (L) during a break from the IMFC meeting as Finance Ministers and Bank Governors meet at the IMF Headquarters April 20, 2013 in Washington, DC. The ministers and governors are attending the IMF/World Bank Spring Meetings in Washington. (IMF Photo/Stephen Jaffe).

International Monetary Fund Managing Director Christine Lagarde (R) speaks the German Finance Minister Wolfgang Schäuble (L) during a break from the IMFC meeting as Finance Ministers and Bank Governors meet at the IMF Headquarters April 20, 2013 in Washington, DC. The ministers and governors are attending the IMF/World Bank Spring Meetings in Washington. (IMF Photo/Stephen Jaffe).

IMF Mission’s “Concluding Statement” (Article IV Consultation) on the German economy which was published yesterday, contains almost the same basic recommendations as the European Commission’s assessment aired at the Semester Press Conference in Brussels on 29 May. Both reports had references to Germany’s over stretched fiscal consolidation (meaning unneeded austerity) and the need to increase wages and reduce taxation on labour, all that in order to better serve the country’s and Eurozone’s efforts for growth.

Fiscal austerity

Starting with the Teutonic austere ideology favouring fiscal overcorrection, the IMF’s mission concludes that, “Over the past three years, the fiscal balance has exceeded plans…fiscal over-performance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment”. This is a clear indication that the Fund tells the German government to relax its internal unneeded austerity, in order to help the country’s and the Eurozone’s economy to grow.

This is exactly what the Commission recommended to Berlin only some days ago. In this respect the President of the EU executive, Manuel Barroso last Wednesday 29 May asked Berlin to relax its internal fiscal austerity policy. He said, “Surplus countries need to remove the structural obstacles to the growth of their domestic demand”. Barroso obviously means that Germany has to spend more to help its own economy and the rest of Eurozone to grow.

Coming to the labour market and the wages level, the EU Vice President Ollie Rehn, had almost the same thing to say as the IMF. According to Rehn, “Our recommendations to Germany today include sustaining the conditions that enable wage growth to support domestic demand. This requires, among other steps, reducing high taxes and social security contributions, especially for low wage earners in Germany”.

As for the IMF the relevant passage goes like this “In the context of an aging population, recent efforts to augment the labour force through tax measures… lowering the tax burden for low wage and secondary earners, increasing availability of full-time high-quality childcare, facilitating migration of medium-skilled workers, as well as identifying and addressing disincentives to having children could hold promise”.

All those recommendations converge towards the same policy proposals; less fiscal austerity and higher take home pay for workers. Those two measures could help Germany grow and Eurozone with it. The IMF insists that “A more robust rebound (of the economy) is being held back by continued weakness in business investment, mainly related to uncertainty surrounding prospects and policies for the euro area, despite the progress made so far. The slight loosening of the fiscal stance envisaged this year is appropriate, and fiscal over-performance should be avoided”. It goes without saying that the outlook is not encouraging at all. The IMF stresses that, “We see risks to the outlook as tilted to the downside”.

Financial risks

Passing now to Germany’s fictitious financial perfection, the Fund’s observations do not support that. “Banking system soundness has improved, but vulnerabilities remain…Overall asset quality has remained broadly stable, although there are vulnerabilities related to exposures to specific sectors such as shipping, international commercial real estate, and certain foreign asset holdings”.

There is no doubt that with those remarks the IMF, after examining very meticulously the health of the country’s banking system, found it less healthy than Berlin wants all of us to believe. Consequently the very low-interest rate cost that the country pays for its borrowing is not quite the result of the alleged soundness of its financial system, but it has to be attributed to the almost zero interest rate on liquidity offered by the ECB.

As a result the very low-interest rates loans accorded by the country’s banks to the above mentioned business sectors, may prove to be very risky assets for the lenders. Under this light Germany could appear as the country which more than others might need in future effective support from the eventual European Banking Union, the enactment of which Berlin today obstructs.

In conclusion, both the austere fiscal policy and the low-interest rate borrowing/lending that Germany pursues with obstinacy today, may prove self-destructive for the country itself.

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