Germany and the IMF
By John Starrels

What happens to Germany's economy in the coming years is not only of interest to its citizens but to the rest of the world as well. And how could it be otherwise. Within the European Union, Germany's economic weight remains predominant. Similar, if more modest, considerations apply to its role as a key player in the global financial, trade, and payments system. This is where the International Monetary Fund comes in.

Created in 1944, the IMF is a cooperative institution of 184 member countries. Since its establishment, the Fund, as it is known to insiders, has made available a substantial amount of external financing to member countries in balance of payments difficulties, along with a growing volume of policy advice and invaluable technical know-how. The key to Germany's relationship with the IMF, as with other capital rich industrial countries, derives from its readiness to engage the Fund in intense policy dialogue on how it can more effectively balance its domestic economic requirements with its membership in the global economy.

Annual economic consultations--Article IV Reviews--between IMF staff and their member countries' Central Banks and Treasuries provide the chief means for accomplishing this end. These consultations are written up as an IMF Staff Report and subsequently discussed by the Fund's twenty-four member Executive Board. The typical result is a finely balanced 'report card,' in which a member country's progress is measured against a set of performance benchmarks. The most recent IMF Article IV Report for Germany, made available to the public on November 2, 2004, put the Board on record in support of Berlin's efforts to address "deep-seated structural problems" as part of the government's Agenda 2010 program. Pension and health care reform were given pride of place. As with most other countries, Germany was not given a free ride by the IMF on this occasion, amid calls to press forward in tackling entitlement reform and reining in expenditures.

So what? As with all such "so what" questions, easy answers are at best elusive. But the accumulating, if informal, evidence appears to suggest that such discussions--to the degree they underline an international consensus on what constitutes 'good' policy--can have a positive domestic impact on member country behavior. As they indeed appear to be having in Germany.

IMF surveillance of Germany's economy is also carried out within the framework of its membership in the European Union generally, and its adherence to the EU's "Growth and Stability Pact." Among the Pact's larger members, both Germany's and France's inability to keep annual fiscal deficits within the 3 percent target range have concerned the Fund. In a mid-February teleconference with journalists, for example, the head of the IMF's European Department, Michael Deppler, took issue with critics who argue that the fiscal shortcomings of larger EU members are the result of the Pact's allegedly rigid expenditure ceilings. The main problems, argues the IMF's Deppler, reside in lagging productivity in the European Union and higher-than anticipated spending by member countries. In Germany's case, for example, Deppler observed that "vastly weaker" economic growth than expected in 2003 made it prohibitively difficult for Berlin to stay within the Pact's 3 percent spending limit.

The IMF's influence over member countries, especially those, like Germany, who do not borrow, is limited. But at the margins, institutions such as the International Monetary Fund can, and do, play a major role in helping remind us that countries, such as the Federal Republic of Germany, are too important to be left alone.

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This article appeared in the April 7, 2005, AICGS Advisor.

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The views expressed in this article are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.