Banking Association: No expansive fiscal policy necessary in the eurozone

10 April 2008 - "The private banks share the view of the International Monetary Fund (IMF) that global economic growth will slow down in 2008 and 2009", said Manfred Weber, Chief Executive Officer of the Association of German Banks, today. The problems in the financial markets, as well as the massive increase in the prices of commodities and foodstuffs, inevitably had a negative effect on the pace of growth.

However, Mr Weber felt that the IMF's forecast of 1.0% growth in Germany in 2009 was too pessimistic: "Given that German companies are well-positioned and in view of a strong upward trend in many emerging economies in which our exporters are operating successfully, we see a good chance, despite a slackening global economy, that there will be no further economic slowdown next year."

Unlike the IMF, the Banking Association called – in Germany and Europe, at any rate – for restraint when it came to expansive macropolicy. As far as interest-rate policy was concerned, Mr Weber advised a cautious approach by the ECB. "The ECB must, also after the relatively high wage settlements in Germany, keep in mind the growing inflation risks in the eurozone. We cannot yet see any scope at present for interest-rate cuts in the inflation trend, like the IMF evidently does." The IMF's suggestion that more attention should be paid to housing price movements in monetary policy was worth considering. At the same time, the theoretical and practical difficulties of such a monetary-policy approach should be borne in mind. The IMF was therefore right not to recommend that monetary policy should specifically target housing prices.

Given that growth was close to its potential mark, Mr Weber saw no need at present for fiscal-policy measures in the eurozone or in Germany. Moreover, the IMF correctly drew attention to the problem of public-sector overindebtedness in many eurozone countries. That went for Germany as well. Despite successfully implementing consolidation measures, Germany had not yet reached its medium-term budget target under the Stability Pact and the debt ratio was over 60%. "There is neither any necessity nor any financial scope for additional spending programmes, especially as wage settlements are tearing unexpected holes in budgets. In the long term, a sound financial policy supports growth better than an expansive spending policy", Mr Weber said.