IMF launches a new offensive against Germany

In the latest issue of its World Economic Outlook (WEO), which was published yesterday, the IMF raises the tone of criticism against Europe. It’s again the risk of deflation and the projection that “economic slack will remain high”, the two axes which constitute the cutting edge of criticism of North America against Eurozone. The latest WEO also notes that the contribution of exports to euro area’s weak growth will increase, while internal “demand will be held back”. This assessment will give substance for more grievances from the US against Germany. Washington accuses Berlin and other surplus euro area countries, that through their increased exports they ‘steal’ the growth potential from their Eurozone peers and the rest of the world. In relation to the October WEO, the IMF marginally raises the growth potential of euro area to 1% for 2014 and 1.4% for 2015. However, the new report states that “recovery will be uneven. The pickup will generally be more modest in economies under stress, despite some upward revisions including Spain. High debt, both public and private, and financial fragmentation will hold back domestic demand”. Stronger criticism Criticism becomes louder when it comes to inflation or rather deflation prospects for Eurozone. The IMF writers actually question their own prediction for one percent growth in euro area this year, by underlining “the risks to the forecast, downside risks—old ones discussed in the October 2013 WEO and new ones—remain. Among new ones, risks to activity associated with very low inflation in advanced economies, especially the euro area, have come to the fore”. The IMF indicates that falling inflation raises real interest rates and thus poses new problems to the over-indebted euro area countries and privates. This prospect may derail any future planning in both the public and the private sectors and trigger more bankruptcies of public entities and private businesses. The criticism about the euro area inflation is dwarfed though by what the IMF has to say about the main economic policy lines in Eurozone, which are currently of Germanic inspiration. IMF starts with a general purpose observation that “Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks. In the euro area, the European Central Bank (ECB) will need to consider additional measures toward this end”. More ECB money needed Now, the entire German government, thinking of the measures that the IMF proposes for ECB to take, may be kept awake for many days in a row. Apart from more long-term liquidity for banks, a measure already partly in use, the IMF proposes that the ECB should apply a policy of “targeted lending”. The aim of all those measures is obviously to “strengthen demand and reduce financial market fragmentation”. In short, the IMF assigns to the ECB the task to take policy measures, which in some respect surpass the mandate of the central bank which, according to Berlin, is to strictly watch for inflation and nothing else. The Teutonic economic policy textbook doesn’t accept any monetary measures in favour of economic growth. The only growth policies that Germany recognises are more work and less pay. Monetary help is totally excluded. With these proposals, the IMF intervenes also in the internal ECB conflicts about targeted lending and financial fragmentation reduction. The anti-German forces in it, led by President Mario Draghi, insist that targeted lending is a solid way to support growth in real economy. Of course the Germanic side of ECB’s governing council disagrees not only with the means (targeted lending) but with the goals too (real economy growth). According to the ‘German economic theory’, monetary measures cannot support effectively real growth. As for the financial markets fragmentation within the Eurozone, the Germans don’t mind if the Italian SMEs cannot find financing. All south Eurozone SMEs are practically cut off from banking loans, and when they finally find credit, they pay for it much dearer interest rates, than their peers in France and Germany for the same business risks. IMF says that this financial fragmentation has to reduced. Again the Fund supports the efforts of Draghi, who has declared war on financial fragmentation, by using all the measures the German comptrollers allow him to. It’s not only that. It seems that the IMF has decided not to let the German government go to sleep for many nights in a row. Its next recommendation is to “Repairing bank balance sheets through the Balance Sheet Assessment exercise and recapitalizing weak banks and completing the Banking Union by unifying both supervision and crisis resolution will be essential for confidence to improve”. In this way, the IMF puts its finger on Deutsche Bank wounds, reminding to Berlin that its showcase lender needs capital and cannot find it from the market. Some months ago Deutsche tested the capital market with an equity issue and attracted a mere €2 billion. German banks x-rayed Next, the IMF tells Berlin that it should stop blocking the construction of the much-needed Eurozone’s Banking Union, because there is no other way to restore confidence. It proposes that “completing the Banking Union by unifying both supervision and crisis resolution will be essential for confidence to improve”. Next come the dark region of relations between the German government and the lenders of the country. There are dark paths that bank credit follows in Germany, supporting some business sectors and companies under non-transparent procedures. A lot of people in Europe say that the link between governments and banks must be cut off, but the IMF means when it says “sever the link between sovereigns and banks”. Last but not least, the IMF repeats the usual American inducement to Germany to complete structural reforms in the services sectors and “lift investment and prospects”. Judging from the extent and the severity of this latest attack of IMF against Berlin, it seems that the other side of the North Atlantic will not rest, until Berlin takes the message and acts accordingly. The target is that Germany should offer more and demand less from the rest of Eurozone and the world.