Opinion: IMF Rebuke Should Accelerate Reform Drive

The latest Economic Outlook report published by the International Monetary Fund (IMF) on Thursday in Dubai (photo) suggests that the global economy is on the way to recovery.

While Asia and the United States remain the key motors driving the world economy, the report says there are few indications of a robust upturn in the battered economies of the 12-nation euro zone and in particular Germany.

The IMF forecasts the global economy will grow by 3.2 percent this year and 4.1 percent in 2004. In contrast, the organization predicts zero growth for Germany this year and a meager 1.5 percent next year, making Germany the only major industrialized country in the world with absolutely no signs of economic growth.

Oppositions seizes upon negative IMF report

It’s clear that the opposition in Germany had waited for this slap in the face from the IMF and will now use it as an excuse to score political points.

A spokesman for the opposition Christian Social Democrats in Bavaria trumpeted immediately that the growth rate forecast by the IMF for Germany for 2003 and 2004 is the result of five years of botched-up economic and financial policies by the red-green government of Social Democrats and the environment friendly Green Party. The former powerhouse Germany has turned into a stumbling block for economic growth in Europe – that’s a clear "unsatisfactory" in the Schröder government’s five-year report card, the speaker said.

Not just black and white

Fine, if one could just simply see things as black and white and didn’t have to consider the nuances the IMF clearly hinted at in Dubai.

It’s right that Germany has reform deficits, and it’s also correct that a national economy with structural flaws absorbs external shocks -- the IMF calls it "geopolitical uncertainties" -- worse than other national economies. And we’ve certainly had enough geopolitical uncertainties in the past: September 11, the Iraq war, the SARS epidemic, the downfall of the New Economy and as a consequence, the worldwide burst of the stock market bubble.

There’s no doubt that Germany coped with these shocks much more poorly than other countries -- that’s evident in the low growth rates and the high unemployment figures.

IMF message should spur on reform process

Therefore it becomes all the more important to eliminate the structural defects in the economy, reform capital and labor markets, prepare a solid basis for the social systems and dismantle bureaucratic hurdles -- exactly what the government is trying to achieve with its reform packages.

And it’s exactly these reform efforts that the IMF has praised unambiguously. It has also described the reform attempt as the most promising initiative in Europe in a long time, and in parts, the reforms don’t go far enough for the IMF.

It’s therefore hypocritical to give the government poor marks for the past and at the same time try to politically undermine the reform process or water it down beyond recognition. Exactly the opposite is called for: implementing the reforms in the labor market, in the health and pensions system and streamlining the bureaucracy as soon as possible.

Reforms now and fast

Otherwise, the other side of the external shocks will become apparent. If a national economy continues to harbor its structural defects, it profits less from an economic upswing.

The Iraq war is over, the SARS crisis has spent itself, crude oil prices are falling, the United States is pursuing a stimulating tax policy, Germany and France are keen to cut taxes. The prerequisites for an economic upturn are present, but they can only lead to profit when the national economy in shape for the boom.

That’s why the message from Dubai should be seen less as a slap in the face for past failures, and more as a clear encouragement to forge new territory by staying on the reform path even more determinedly than before.

And time is money. The U.S. may currently be the motor driving the world economy, but it’s paying a price for its economic growth with low interest rates, massive debts and enormous deficits in its trade balance. If this economic motor sputters, then Europe can only endure the external shock if it has remedied its own structural flaws through bold and timely reforms.