–Surplus Countries Can Offer Only Limited Support Via Fiscal Spending

FRANKFURT (MNI) – Current account imbalances within the Eurozone
have declined as a result of the crisis, but more action is needed by
deficit countries, the International Monetary Fund said Wednesday.

“The significant increase in individual euro area member current
account deficits and surpluses and their persistence since the advent of
EMU has been partly reversed by the recent crisis,” the IMF said in its
Article IV report.

“In surplus countries, fiscal policy is providing short-term
relief, e.g., with Germany’s headline deficit set to double in 2010,”
the report said. However, it warned that “the effect of this policy is
indirect and very small.”

The fund noted that while “weak domestic demand, notably low
corporate investment in Germany also played a role,” the key driver
behind the build-up in imbalances is “to be found in the deficit
countries, facilitated by easy financing by foreign investors.”

“Domestic imbalances linked to unsustainable credit and
construction booms, a lack of fiscal restraint, and unsustainable wage
developments all contributed significantly,” the IMF said.

“As a result, unsustainable asset and demand booms emerged in some
places, and a common monetary policy became increasingly ill-suited for
individual parts of the region, creating destabilizing real interest and
exchange rate dynamics,” it added.

Looking ahead, “deficit countries will need to play a key role in
resolving the imbalances,” the report said.

“In addition to appropriately strong fiscal consolidation,
increasing product market competition, improving nominal wage
flexibility, and adjusting labor market models would go a long way in
addressing the structural and competitiveness issues behind much of the
intra-euro area imbalances,” the fund advised.

Surplus countries can offer only limited support via fiscal
spending, the IMF said.

“According the IMF staff simulations, one percent of GDP fiscal
expansion by Germany improves the current account of southern European
countries by no more than 0.1 percentage point of GDP,” the report read.

“Given these limitations and constraints on fiscal space,
structural policies in surplus countries will be crucial,” the IMF
asserted. “In Germany, for example, service and financial sector
reforms, combined with lower employment protection, would create
investment opportunities and boost domestic demand.”

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

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