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October 03, 2005

A Fistful of Euros

One of the very best commentators on the European scene is A Fistful of Euros:

A Fistful of Euros: Germany To Exceed Deficit Limit Till 2010 : by Edward: The IMF has just published Chapter One of the autumn 2005 edition of the World Economic Outlook. The key section on the eurozone economies can be found between pages 25 and 29 (including the interesting Box 1.3). The Table where you can find the information on German debt projections is on page 15, and there you will see that the government deficit is projected to remain over 3% at least until 2010. In addition the level of indebtedness is projected to rise from just under 60% of GDP in 2002 to nearly 75% in 2010. (Italy incidentally is seen as quietly suffering from melt-up at 115% of GDP come 2010).The reasons for this trend:

Unsustainable medium-term fiscal positions remain a key risk. Among the major industrial countries, fiscal deficits are expected to decline only modestly over the medium term (outside Canada, which remains in surplus), with rising public debt ratios in Japan, Italy, and Germany of particular concern. In most countries, despite past reforms, fiscal pressures from aging populations remain a serious concern, especially for health care.

There is also a summary of the press briefing on the WEO given by Economic Counsellor and Director of the IMF Research Department Raghuram Rajan to be found here. The following interesting exchange takes place during the question and answer session:

QUESTION: I have a question on Germany. Germany has the weakest growth this year and next year according to your forecast. We just had elections with very inconclusive results. Germany could be drifting in any direction. What in your view has to be the hallmarks of the new German government to get going?

MR. RAJAN: Well, I think the previous German government or the current German government has undertaken a set of reforms. Those reforms have to be taken to their logical conclusion. For instance, on the one hand, we have created more labor supply in Germany. Now you have to create the demand for that labor by increasing the incentives for corporations to actually hire more people, for example by reducing some of the regulatory burden on them, reducing the extent of payroll taxes, and so on. So creating the demand for labor by making labor hiring more flexible and so on, this is an important step that has to be taken. Similarly, there are steps right through the economy, for instance in the financial sector, allowing for more competition between states. One could walk through the set of needed reforms. I think it is quite plain in Germany what has to be done, and I hope these things can, in fact, be done by the new government, whoever it is. David, would you like to add anything?

MR. ROBINSON (David Robinson, Deputy Director, Research Department): Just to add one further thought. I think another area where Germany and indeed many countries in Europe clearly also have to move forward is ensuring the medium-term fiscal situation is sustainable. When you look past 2010 in Germany and the pressures that will come on expenditures from both pensions and health, they are quite substantial. So, again, I would say that one thing that we feel quite strongly is that Germany needs to make, I would say, more progress towards getting its long-term fiscal house in order, with the aim of trying to get to broad structural balance on the fiscal accounts by 2010.

Posted by DeLong at October 3, 2005 12:33 PM