IMF Says Germany Should Rebalance Economy for the Benefit of All

(Bloomberg) -- Germany should cut taxes and upgrade its digital infrastructure to reduce its vulnerability to external shocks such as trade protectionism, according to the International Monetary Fund.

The imbalance in Europe’s largest economy is reflected in its current-account balance, the IMF said in its regular review. That message echoes a frequent complaint from the nation’s trading partners and is a particular sore point with U.S. President Donald Trump.

“Though the external surplus has come down from its peak, it remains well above the level consistent with fundamentals and is expected to remain so in the medium term. This contributes to global imbalances at a time when trade tensions threaten Germany’s export-dependent economy”
-- IMF Article IV Statement

The economy in Germany, where the government is running a budget surplus, stagnated at the end of last year. A rebound this year now looks under threat as the U.S. ramps up trade tensions, though some companies may be poised to benefit by picking up China business.

The IMF points out that the nation’s current-account surplus peaked at 8.5% of GDP in 2015 and is only slowly coming down, to 7.3% last year. It says the key to righting the economy lies in wage growth, which has been slow coming despite record-low unemployment.

Key Recommendations:

  • Using space within European Union fiscal rules to bolster long-term growth, including lower taxes for low-income workers and reducing disincentives to work for secondary earnings
  • Upgrade the digital infrastructure
  • Encourage the banking sector to restructure
  • Enhance banking resilience and guard against imbalances in the real-estate sector

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