IMF chief urges public spending reduction in France and transport infrastructure investment in Germany

IMF managing director Christine Lagarde told France’s Les Echos newspaper: “Germany most probably has the fiscal space to support the European recovery and is offering to use it.”

Lagarde said that public and private investments aimed at financing infrastructure in Germany “would be welcome”. “I am not talking about creating new highways, but rather about investments in maintenance and upkeep... over the past few years, Germany has invested very little in its transportation infrastructure. Just like in the United States, the network is deteriorating, which makes stepping up efforts perfectly justifiable.”

Lagarde said Germany intends to earmark 0.2% of gross domestic product (GDP) for maintenance and upkeep over the next four years. However, she said IMF analysis showed Germany “could dedicate an additional 0.5% of GDP annually over four years”.

“Germany could also contribute to the European recovery with greater wage distribution,” Lagarde said. “This would enable German consumers to fuel recovery. Given the favourable labour market conditions, we expect wage dynamics to move in that direction. These developments would likely support activity in Europe.”

Meanwhile, France “should stay the course on reducing public spending”, Lagarde said: “Even if inflation is lower than anticipated, it cannot be used as a smokescreen to put off the necessary efforts on spending. Nor should the situation justify new tax hikes. Low income due to exceptionally slow growth should not encourage a country to introduce stiffer taxation in order to achieve a nominal target. Bear in mind that the path of fiscal consolidation is not a terribly difficult one.”

Lagarde said that if a reduction in public expenditure is “largely offset by tax breaks, as France is contemplating doing, the effect on demand remains manageable”.

On structural reform, Lagarde said that the liberalisation of regulated professions in France “is not necessarily the easiest route to take, but I am pleased that this door has been opened”.

However, Lagarde said: “What needs to be done, first and foremost, is to break the shackles of labour regulations, and I do not mean just in France, but in the entire euro area. The only country making headway in this regard this year is Spain. It introduced a number of structural reforms, and they are beginning to pay off.”

On the wider euro area, Lagarde said “much has already been accomplished... and we feel that the pace of fiscal deficit reduction today is appropriate to each country”.

Lagarde said: “We do not think that the euro is overvalued against the dollar. Its value is consistent with the euro area balance of payments. However, the direction in which it is headed today is likely to boost recovery, and that is a good thing.”

The IMF’s latest annual assessment of France’s economy, published in July, said the country needed “deeper structural reforms” including opening “protected sectors” to greater competition. However, IMF executive director for France Hervé de Villeroché said the organisation expected to see a recovery of France’s economic climate in 2014-2015 “thanks to increased business and household confidence, as well as the implementation of structural reforms”, notably as a result of the government’s ‘Responsibility and Solidarity Pact’, launched earlier this year.