IMF Concludes 2007 Article IV Consultation With Germany

by Carla Johnson, Investors Offshore.com, London

29 February 2008

On February 22nd, 2008, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with Germany.

The Executive Directors welcomed the marked strengthening of Germany's economic performance of the past few years, and commended the consolidation and reform policies that have made these gains possible, including an impressive increase in employment and the best fiscal position since unification.

Nonetheless, the reform agenda remains unfinished, and the near-term outlook is for slower growth and higher inflation, with the balance of risks modestly on the downside, the IMF suggested.

Looking forward, Directors agreed on the need for the authorities to maintain short-term stability, especially in the financial sector, and to persist with the outstanding medium-term reform agenda.

Directors noted that the global economic slowdown, the strength of commodity prices, and financial tensions are having their impact on Germany. Fortunately, the relatively sound financial position of most banks and the low reliance of enterprises and households on credit have so far helped maintain normal lending, and while growth is slowing, it is expected to remain close to potential.

At the same time, consumer and business confidence have weakened, credit standards have tightened recently, and some banks are facing continuing difficulties. In view of the yet unknown dimensions and fast-moving nature of the current global financial market turmoil, Directors urged the authorities to remain vigilant.

The Directors also observed that the fiscal position is moving from overall balance in 2007 to a moderate deficit in 2008. They generally considered that this fiscal loosening should help cushion the effects of the anticipated economic slowdown.

Looking further ahead, Directors viewed fiscal sustainability as within reach, and they encouraged the German authorities to move to complete the reform process and associated consolidation steps in order to secure it. In particular, achieving long-term fiscal sustainability will require tackling healthcare expenditures.

Directors welcomed the authorities' intention to move to a fiscal framework centered on maintaining the overall deficit close to balance in cyclically-adjusted terms.

Directors welcomed ongoing discussions with regard to strengthening banking supervision. Looking ahead, they urged more frequent financial statements and more widespread use of International Financial Reporting Standards (IFRS) reporting to better capture off-balance-sheet activity.

They considered that despite recent efforts, further measures are needed to enhance supervisory accountability and raise the quality of supervision. Directors therefore welcomed the recent protocol to improve coordination between the Bundesbank and the financial sector supervisory authority (BaFin).

In addition, the Directors noted that the intensification of international financial integration suggests a need to restructure the German banking sector. Global competition is likely to continue to erode the traditional business models of banks that only serve targeted communities.

Directors considered that bank restructuring should be guided by the goal of creating robust and sustainable banks, while allowing private capital to play a role.

Directors called on the authorities to safeguard their hard-won economic gains by pressing ahead with their medium-term reform agenda in the areas of labor markets, the general framework for investment, the financial sector, and fiscal policy. They pointed to the risks attached to any pause in the broader structural reform process for the achievement of long-term sustainability.

Finally, the IMF Directors welcomed efforts to further develop capital markets, and underscored the importance of promoting transparency in corporate governance.

They considered that rationalizing company supervisory board structures could help raise efficiency, and they saw a role for strengthening disclosure standards to improve internal and external discipline imposed on company managements. Directors cautioned against initiatives that would further empower insiders or render governance more complex.

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