IMF: Germany Should Consider Easing Debt Brake

The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
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IMF: Germany Should Consider Easing Debt Brake

The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights
The sun sets behind the financial district early evening in Frankfurt, Germany, October 4, 2018. REUTERS/Kai Pfaffenbach Purchase Licensing Rights

Germany faces rising spending pressures and the government should consider easing the debt brake, the International Monetary Fund said on Tuesday, but finance ministry sources said such a move carried the risk of fuelling inflation.

Altering the rules of the debt brake, which limits public deficits to 0.35% of gross domestic product, would require a two-thirds majority in the upper and lower houses of parliament.

"Germany's debt brake is set at a relatively tight level, such that the annual limit on net borrowing could be eased by about 1 percentage point of GDP while still keeping the debt-to-GDP ratio on a downward trend," the IMF said in a report.

This would allow more room for "much-needed" public investment, it said, according to Reuters.

In November, a court ruling blew a 60 billion euros hole in public finances and threw the government's financing framework into turmoil.

Although reforming the debt brake would ease fiscal consolidation, reforms to reduce medium-term spending pressures and increase revenues were also needed, the IMF added.

The brake is fiercely defended by Finance Minister Christian Lindner. According to finance ministry sources, the IMF recommendation carries risks.

"Reforming the debt brake harbours the risk of once again fuelling inflation, which has only just started to fall," said the sources, adding that higher debt also meant higher interest rate costs.

In its World Economic Outlook published in April, the IMF cut its forecasts for German gross domestic product to 0.2% growth in 2024 and 1.3% in 2025, expecting a gradual consumption-led recovery this year as inflation continues to ease.

A return to growth is expected to gradually reinforce confidence, further bolstering consumption in 2025.

Private investment is also expected to recover in 2025 on the back of improved demand and moderate monetary policy during 2024 and 2025. "As a result, GDP growth is projected to accelerate to between 1.0% and 1.5% during 2025-26," the IMF said.

Over the medium term, rapid population aging is expected to slow growth and adversely affect public finances.

As baby boomers retire and recent immigration waves subside, the annual growth rate of Germany's working-age population is expected to fall by around 0.7 percentage points, more than any other G7 country.

These unfavourable demographics are projected to slow annual growth to around 0.7% over the medium term.

The IMF said medium-term growth prospects could be bolstered by increasing public investment, including in the green transition and digitalisation.

To further boost productivity and entrepreneurship, the government should deepen efforts to cut red tape and promote digitalisation, the IMF advised.



IMF Board Approves Argentina Payout of Almost $800 Mn

Argentina's president Javier Milei has vowed to get inflation back down - AFP
Argentina's president Javier Milei has vowed to get inflation back down - AFP
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IMF Board Approves Argentina Payout of Almost $800 Mn

Argentina's president Javier Milei has vowed to get inflation back down - AFP
Argentina's president Javier Milei has vowed to get inflation back down - AFP

The IMF executive board voted to approve a payout of almost $800 million for Argentina as it continues a program of drastic economic reforms under its libertarian president, Javier Milei.

A self-declared "anarcho-capitalist," Milei has vowed to halt Argentina's economic decline and reduce the budget deficit to zero, and has embarked on a program to slash public spending and bring down inflation, which remains at an annual rate of more than 275 percent, AFP reported.

"The Executive Board assessed the program to be firmly on track, with all quantitative performance criteria through end-March 2024 met with margins," the International Monetary Fund said in a statement.

The decision by the IMF executive board to approve the eighth review of its loan program with the Latin American nation will allow for the disbursement of just over $793 million, bringing the total disbursements under the existing program to more than $41 billion.

"The Board emphasized that sustaining the strong progress requires improving the quality of fiscal adjustment, initiating steps towards an enhanced monetary and FX (foreign exchange) policy framework, and implementing the structural agenda," the IMF said.

"Continued efforts to support the vulnerable, broaden political support and ensure agile policymaking will also be necessary," it added.

"The good news continues," Milei wrote on X, sharing the IMF statement.

The payout approval follows an announcement earlier in the day that Argentine inflation came in at 4.2 percent in May, the lowest in two-and-a-half years, according to the INDEC statistics agency.