January 17, 2018
The economic outlook for Germany is bright. Optimism among investors abounds, and unemployment is at a record low. Policymakers now have a unique opportunity to address the challenges facing the German economy. These are varied but include boosting wages, investing in infrastructure, and reducing the large trade surplus. As the largest economy of the euro area, Germany also has a stake in fostering reforms in the monetary union. Successfully rising to these challenges is critical for Germany and for the euro area as a whole.
To delve more deeply into these pressing debates, the IMF and the Deutsche Bundesbank are tomorrow (January 18) hosting a conference entitled “ Germany—Current Economic Policy Debates .” By meeting in Frankfurt to discuss these issues, policymakers and other participants have the opportunity to drill down on the key issues affecting the German economy and discuss ways of addressing them. For the IMF’s part, we see room for constructive dialogue on several fronts, discussed in our latest report on the German economy .
Challenge 1: Wage growth and inflation
In Germany, the earnings that people take home each month are still growing pretty slowly. Subdued wage growth was for a long time attributed to the labor market reforms of the early 2000s. Now, however, they seem increasingly at odds with record-low unemployment rates and strong GDP growth. In the years that followed the global financial crisis, Germans agreed to keep their wage demands in check to preserve jobs. Today’s stronger economy creates an opportunity to address subdued wage growth. Doing so would be good for people’s spending power, and also for economic growth.
Faster wage growth in Germany―where the economy is operating above capacity―would also help Germany’s European peers because it would help lift euro area inflation toward the European Central Bank’s inflation target. For these reasons, it is important to consider whether a German wage acceleration will soon be under way, or whether adjustment is going to be delayed or maybe even held back by some fundamental factors, as well as the related policy implications.
Challenge 2: Aging society, budgetary surplus
Germany’s fiscal position is healthy: the public debt ratio is falling rapidly and the government is posting budget surpluses. The key question is how to make the best use of this room for maneuver in public spending. Should resources be used to enhance growth on the long-term, by, for example, building roads, creating training programs for refugees, and providing high-quality childcare and afterschool programs? Or should the surpluses be saved for later, to pay for higher pensions and health-care costs as population aging accelerates?
Maybe the answer is a bit of both, but we at the IMF see a particularly strong case to use head room in the budget (including beyond the “black zero”, namely the balanced federal budget) to invest more in public infrastructure, such as roads, railways, and digital infrastructure. We have also advised the government to spend more on reforms that help women go back to work, such as opening more childcare centers and kindergartens. Our view is that higher growth in the long term will improve prosperity, helping to offset the costs of an aging society.
Challenge 3: More balanced savings and investments
Another feature of the German economic recovery is the country’s high current account surplus. At nearly 8 percent of GDP, it is also the highest in the world in dollar terms. The high surplus shows that German households and companies still prefer to save rather than invest.
For our part, the IMF has indicated that this surplus is too large—even considering the need to save for retirement in an aging society. Boosting investment in the German economy and reducing the need to save for retirement by encouraging older workers to remain in the labor force can lower the surplus. We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension.
Germany has a bright economic outlook, and the good news is that this is now also the case for the euro area as a whole. In our latest report , we project strong growth in the 19-member group over the next couple of years. But this growth can only be assured if essential elements of the euro area’s economic architecture are put in place. For that, the support of Germany—the euro area’s largest economy—is essential. I welcome that the preliminary coalition agreement correctly recognizes the centrality of these issues.
That is why we have called on euro area members to complete the banking union with greater risk sharing. It is why we have urged them to build a central fiscal capacity to provide a cushion in bad times. And it is why we have advocated for advancement of the capital markets union, so as to add a layer of private cross-border risk sharing.
For this to be politically as well as economically possible, countries with high debt levels should rebuild their budgetary buffers. And all countries should put in place policies to increase productivity, which has largely stagnated since the end of the global financial crisis. Those are key elements of an economically stable and growing Europe.
As we have been saying in recent months about the global economy, “The time to repair the roof is when the sun is shining.” For Germany and for the euro area, the dawn has broken and the sun is today shining brighter than it has for quite some time. That’s very welcome news—let’s make the most of it by repairing the roof.