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01/10/2016

US blames Germany for growth imbalances

Social Europe & Jobs

US blames Germany for growth imbalances

The United States warned Europe on Thursday (9 April) against relying too much on exports for growth, and urged officials to make more use of fiscal policy, saying stronger demand was essential.

In its semiannual report on foreign-exchanges policies to Congress, the US Treasury Department gave a preview of the positions it will press on foreign policymakers during next week’s International Monetary Fund meetings in Washington.

The world cannot rely on the United States to be the “only engine of demand,” the report insisted. It urged nations to use all tools available to accelerate growth and not rely only on their central banks to boost recovery.

The report singled out Europe’s biggest economy, saying “stronger demand growth in Germany is absolutely essential, as it has been persistently weak.”

The US Treasury argues that policy makers in the euro area need to use fiscal policies to complement the monetary stimulus that the European Central Bank is providing. America is wary of the eurozone’s rising current account surplus, a broad measure of cross-border flows of goods and capital.

The Treasury noted the European Central Bank was taking forceful measures to help, but that complementing the monetary stimulus with taxpayer money and economic reforms “would avoid the risk that growth becomes excessively reliant on the external sector.”

While growth in Europe has shown some recent signs of picking up, the region remains the sick man of the global economy.

Lagarde agrees

Speaking ahead of next week’s meetings, IMF managing director Christine Lagarde also warned that global recovery remained ‘moderate and uneven’ with too many parts of the world not doing enough to enact reforms even as risks to financial stability are rising.

Mediocre economic growth could become the “new reality,” leaving millions stuck without jobs and increasing the risks to global financial stability, she insisted.

In its last forecasts in January, the IMF said the global economy grew 3.3 percent last year, advanced economies expanded by 1.8 percent and emerging markets grew 4.4 percent.

“It is not that overall growth is bad,” Lagarde said. “It is rather that, given the lingering impact of the Great Recession on people…growth is just not good enough.”

While loose monetary policies are still needed, especially in the eurozone and Japan, very low interest rates are also breeding financial instability as investors tolerate higher risks and may overprice assets.

As in previous speeches, Lagarde called for policymakers to pursue structural reforms, including infrastructure investment and trade reform.

The Obama Administration didn’t single out only Germany, but also China, Japan and South Korea which are running large trade surpluses that need to do more to combat weak global growth.

Washington also called China’s currency “significantly undervalued,” but said Beijing appeared to be less heavy handed in its currency interventions, and had recently intervened to prop up the yuan’s value.

On Thursday, the dollar surged against the euro after an encouraging US unemployment claims report stoked speculation about the Federal Reserve’s plan to raise ultra-low interest rates.