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IMF’s Lagarde: Germany needs structural reforms

Financial Times Financial Times

 

 

by: Mehreen Khan

How’s that for a taste of your own medicine.

 Christine Lagarde, managing director of the International Monetary Fund, has called on Germany to do more to remedy its persistent trade surplus with the rest of the world, telling the country to swallow its own mantra on implementing structural reforms.

Speaking at the Norwegian central bank in Oslo, Ms Lagarde warned an unbalanced global economy was struggling to deal with the dual shocks of a Chinese slowdown and the collapse in oil prices, writes Mehreen Khan.

 In particular, she urged Europe’s largest economy to use its healthy public finances to boost spending and carry out major reforms to open up closed sectors such as services.

This would boost German growth and shift the exporting powerhouse’s reliance on manufacturing which has helped its current account surplus hit a record 8 per cent of GDP.

Increasing competition in closed industries and freeing up labour markets has been been a key plank of economic reforms Germany has championed for its fellow member states such as Greece.

Ms Largarde said:

Germany could use more of its fiscal space to close domestic investment gaps, and open up its services markets to boost competition

Fiscal and structural reforms will not only lift private investment and long-term growth. They will also help narrow Germany’s large current account surplus.

According to IMF calculations, a 1 per cent decline in China’s headline growth rate reduces the world’s GDP by 0.2 percentage points.

China’s slowdown, coupled with an oil price collapse which has been less of a “windfall” and “more like a breeze” for the world economy, Ms Lagarde repeated her gloomy outlook on the world:

So compared with past cycles, lower oil prices have not helped overcome the drag from other factors causing slow growth and asymmetric recoveries in oil importers – such as public and private sector debt overhang, slow credit growth, weak employment and low wage growth, and rising inequality, to name a few.