The Monetary Fund is expecting growth of two percent, and it could be slightly higher in the coming year – but only if the numerous risks do not materialize.
“There is a lot of uncertainty,” said Oya Celasun, head of the Germany mission at the IMF. The report mentions several serious risks at the same time: the energy supply must be secured, the supply bottlenecks in international trade must slowly be resolved and further corona restrictions must be avoided.
The greatest risk, however, is an end to gas supplies from Russia. The Monetary Fund refers to studies according to which gross domestic product (GDP) could fall by up to six percent for one to two years.
Should one of the problems actually burden the economy, the German government would have to take countermeasures from the point of view of the IMF. In view of the uncertainty, financial policy must remain flexible, writes the IMF expert. “There are scenarios in which another exemption from the debt brake could be necessary,” said Celasun.
Federal Minister of Finance Lindner receives praise
However, as long as the economy is stable in line with the forecasts, Celasun considers the plan of Federal Finance Minister Christian Lindner (FDP) to comply with the debt brake again in the coming year to be “reasonable”.
Basically, German fiscal policy comes off better in the report than in earlier analyzes by the Monetary Fund. In recent years, the IMF has repeatedly asked the federal government to take out more loans in order to increase investment. Since the beginning of the pandemic, however, Germany has accumulated record debt, and the federal government is also planning annual investments of around 50 billion euros. This course should be continued, according to the message from the International Monetary Fund.
In addition, the framework conditions have also changed. The IMF is particularly concerned about high inflation. The Monetary Fund estimates it at around 6.5 percent. In 2023 it should still be 3.5 percent. Large-scale government spending programs to stimulate demand do not make sense here. The IMF is in favor of “targeted aid”, for example for poorer households suffering from high energy prices. According to Celasun, priorities must also be set for government spending.
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The Monetary Fund even warns the federal government to respect the debt rules. According to the report, the creation of sub-budgets could damage the credibility of the guidelines.
The traffic light coalition has shifted around 60 billion euros in unused corona emergency loans to the energy and climate fund in order to finance investments. In addition, she is planning a special fund of 100 billion euros to upgrade the Bundeswehr. These measures are necessary in order to react quickly to the new challenges, said Celasun. However, these extra budgets should be integrated into the normal budget over time.
It is rare for Germany to be admonished by international organizations to observe its debt rules more strictly. Normally, it is the federal government that primarily calls on the other euro countries to comply with the requirements.
European debt rules remain suspended
Despite German concerns, the EU Commission wants to suspend the euro debt rules in the coming year. The governments would only have to pay attention to the stability criteria again in 2024.
These stipulate that the euro countries limit their national debt to 60 percent and their budget deficit to three percent of national economic strength. The average debt burden in Europe is now more than 90 percent, making it correspondingly difficult to comply with the rigid requirements of the stability pact.
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The Commission is aware of this and wants to make the rules more flexible. But that is controversial among the euro countries. The Commission actually wanted to present its reform proposal before the summer break, but now it wants to wait until the fall. Economists are following the discussion closely.
“A minimally invasive change will not solve the problem,” says Armin Steinbach, a professor at the HEC Paris University of Economics and Business, who last year worked on proposals for the reform of the Stability Pact as head of department in the Federal Ministry of Finance. “We need an instrument that takes into account the differences between the euro countries.”
Instead of sticking rigidly to the deficit criteria, Steinbach proposes adopting a method from the IMF: the analysis of debt sustainability. In doing so, the IMF takes into account factors such as interest rates and a country’s growth prospects, instead of just looking at debt ratios.
Because a change in the European treaties can hardly be enforced politically, Steinbach advocates giving the countries more time to reach the 60 percent target – especially if the analysis of their debt sustainability is positive.
On the other hand, Gitta Connemann, Federal Chairwoman of the SME and Economic Union and CDU member of the Bundestag, warns: “New debt is like a drug – it gives a short-term kick, but is destructive in the long run. That’s why the federal government in Brussels has to fight for budgetary discipline.” Otherwise, “the economic and financial system of the EU would falter.”
Brussels is demanding a major tax reform from Berlin
At the same time as the IMF, the EU Commission also presented its recommendations for the new federal government. Brussels sees a need for reform in a number of areas. The EU Commission is urging the federal government to take a measure that the traffic light strictly rejects: a major tax reform.
It is true that Germany has taken a step forward by abolishing the solidarity surcharge for 90 percent of taxpayers. But the tax and duty burden in Germany is still “one of the highest of all EU countries,” writes the Commission.
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The German tax system creates major misguided incentives, since it is hardly worthwhile to work more because, despite working more hours, there is hardly any money left over. The EU Commission writes that tax framework conditions are important in order to recruit skilled workers in times of labor shortages and to expand employment as far as possible.
Therefore, a “far-reaching reform” is necessary. For example, the federal government should flatten the “swelling of small and medium-sized businesses”, which would put a heavy tax burden on low earners in particular. At the same time, the traffic light government could turn other tax screws.
The environmental taxes in Germany are comparatively low. Other taxes could also be adjusted without having an impact on growth and burdening low incomes. Here the EU Commission remains vague, but it is likely to have taxes for higher incomes in mind. In addition, Germany must prepare its pension system for demographic change, as pension expenditure is expected to continue to rise.
Better management needed
The EU Commission still sees a high need for investment in Germany. The estimated need in terms of decarbonization, digitization, education and transport amounts to 1.3 to 2.1 percent of annual economic output.
In their current state, the power grids in particular would not be able to cope with the ecological restructuring of the economy. The EU Commission also sees a particular need to catch up when it comes to digitization. The digital networks and the digital administration in Germany are still “slow”.
In order to make progress here, Germany must eliminate bottlenecks in investments. For almost a decade, billions in investment funds have remained in public budgets year after year because the funds are not called up due to administrative bottlenecks, such as a shortage of civil engineers in local government.
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