IMF Urges Germany to Work With Europe on Debt Crisis

The International Monetary Fund urged Germany to work with its European partners to “address the challenges” posed by the debt crisis in the 17-nation euro area and increase spending if needed.

The German economy, Europe’s largest, has had a “sharp rebound” in growth and is poised to recover in the face of the drag from the turmoil, the IMF said in reports released today in Washington. That recovery is at risk if the crisis spills over into Germany’s economy and financial system, the IMF said.

“The main priorities in the period ahead will be to manage the transition to domestic demand-led growth, secure financial stability, and address the challenges posed by the euro-area crisis in conjunction with European partners,” according to the Washington-based lender. It estimated German economic growth at 1 percent this year and 1.4 percent in 2013.

Chancellor Angela Merkel has pledged her full support to maintaining the euro common currency. At the same time, she has resisted proposals for debt-sharing in the form of euro bonds in the 17-nation area.

While most of the IMF officials responsible for the report view Germany’s deficit-cutting policies as appropriate and would advocate higher spending only in the event of a “serious economic downturn,” a minority want Merkel to lessen austerity to “aid the regional and global economic recovery.”

Downside Risks

Germany’s near-term economic outlook faces downside risks, including a “strong intensification” of the crisis and a drop in global growth, the IMF said.

An IMF staff report released today said: “The main risk facing Germany is an intensification of the euro-area crisis, which would spill over into Germany through real and financial channels.”

“While German banks are generally meeting the minimum levels of required regulatory capital and have ample liquidity, they remain highly leveraged, dependent on wholesale funding, have low capital quality and profitability, and some institutions are significantly exposed to the euro area periphery,” the IMF said.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net