IMF Report Criticizes German and EU Economies

The international financial community prepares itself for a week of tough talking in Dubai this week as the annual meetings of the World Bank Group and the International Monetary Fund (IMF) informally begin on Thursday. And despite initial optimism that the economic outlook has brightened since the end of the Iraq war, the IMF has warned that global recovery from the sluggishness of the past two years remains fragile. One area of concern remains the performance of the euro zone.

In the IMF’s Economic Outlook document released on Thursday, in which forecasts for economic growth, potential dangers and opportunities are outlined, the European economy has been identified as the slowcoach in the tentative global marathon towards recovery with Germany singled out as one of the most persistent stragglers.

While hopes abound that the current growth in the United States will continue to improve this year and next, the IMF believes it will not be enough to drive the world economy forward on its own, despite concerted efforts of assistance by the Japanese. A strong showing by Europe, however, would provide a well-needed helping hand. Unfortunately, the IMF doesn’t see this happening any time soon.

Euro zone growth forecast slashed

The IMFconfirmed it has slashed growth forecasts for the 12-nation euro zone both for this year and 2004. According to its report, the deficits in gross domestic product (GDP) in both Germany and France will widen to 3.9 percent.

It will be Germany’s largest shortfall since 1975; for France the biggest since 1996. Both nations are violating an EU deficit ceiling of 3 percent of GDP this year and probably will for a third year in 2004, a situation which threatens the EU’s Stability and Growth Pact.

The performance of Germany, Europe’s largest economy, is likely to contribute to the estimated sorry growth of the euro zone economies over the coming two years, according to the IMF. The ailing EU powerhouse, struggling to drag itself from recession, will continue to add to the economic woes of the region where growth is predicted to be only 0.5 percent this year and 1.9 percent in 2004, in contrast to IMF estimations released in April which projected growth rates of 1.1 percent and 2.3 percent.

In contrast, global economic growth will accelerate to 4.1 percent in 2004 after reaching 3.2 percent this year, staying true to IMF forecasts made in April.

Germany named as one country responsible

The report went on to blame Germany for not adhering to the euro zone fiscal rules because of its failure to reduce its structural deficits when there was an economic boom. France and Italy were also included in the criticism for similar breaches.

“For the third year in succession, the German economy has stayed in a feeble state, contributing to the below average performance of the whole euro zone and threatening the prospects of a recovery,” the report stated.

However, the IMF’s chief economist Ken Rogoff added his own comments on the state of the German economy in relation to the euro zone at the unofficial opening of the talks in Dubai, praising the efforts of the German government to get things under control through the proposed implementation of the Agenda 2010 reform package.

IMF praises and encourages reforms

The IMF has said that countries should be allowed to breach the EU pact's three-percent limit, if they are undertaking credible long term actions to strengthen their underlying budgetary position.

But Rogoff stressed that Germany’s Agenda 2010 plan was just one step in the wider reforms that should be put into action within the European Union. He added that the euro zone should embark on "more sustained and vigorous structural reforms," starting with the job market and pensions, to aid economic recovery.