IMF urges Germany to boost its infrastructure investments tenfold

Angela Merkel

Chancellor Angela Merkel’s government should raise infrastructure investments tenfold compared with a blueprint laid out in the 2014-17 budget plan to help euro-region members such as Italy, the International Monetary Fund said. 

Germany has leeway to raise spending on items such as road and bridge maintenance by half a percentage point of gross domestic product per year over four years, equating to more than €50bn, without violating its debt reduction commitments, the IMF said in a regular report on the German economy. Merkel’s government plans to spend €5bn through 2017 to fix decaying infrastructure.

“Germany has the fiscal space to finance an increase in needed public investment, particularly in the transport infrastructure,” the Washington-based institution said in its so-called Article IV consultation report. “Unlike public consumption, this would durably raise German output and have measurable growth spillovers on the rest of the euro area.”

The IMF’s advice is the latest in a series ranging from US. Treasury Secretary Jacob J. Lew to Nobel laureate Paul Krugman that aims to get Germany to spend more and ease imbalances with slower-growing countries in the 18-nation currency area.

The €5bn earmarked for infrastructure spending over four years equate to 0.2 percent of GDP, falling short of as much as 0.4 percent of GDP per year that’s needed in transport alone, the IMF said.

“The policy would also stimulate growth in the region, with peak effects on GDP in Greece, Ireland, Italy, Portugal, and Spain and other euro area countries of 0.3 and 0.4 percent, respectively, in the likely case that monetary policy remained accommodative,” the IMF said. “The increase in the debt-to-GDP ratio in Germany would be minimal given the growth offset.”

German authorities consulted for the report agreed that higher public and private investment would be welcome while they expressed scepticism over the need for demand stimulus in the rest of the euro area, and saw structural reforms as the main priority, the IMF said.

The IMF raised its growth forecast for Germany from predictions in its April World Economic Outlook to show an expansion of 1.9 percent in 2014 and 1.7 percent next year, generating budget surpluses of 0.2 percent of GDP each year.

The current account surplus will shrink from 7.5 percent last year to 7 percent in 2014 and 6.7 percent in 2015, it said.


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