IMF pushes Germany to implement 'pro-growth' measures

Frankfurt, Germany.

The International Monetary Fund said Wednesday that Germany's increased public expenditure must be supported by "pro-growth" changes to ensure Europe's battered top economy recovers steadily.

Chancellor Friedrich Merz's coalition is increasing spending on infrastructure and defence, hoping to spark a recovery after two years of recession.

Following a visit to Germany by several of its officials, the IMF praised the country's "landmark" move this year to relax tough debt limits, paving the door for a significant rise in public spending.

This has "set the stage for economic recovery", according to the statement.

However, the financial institution advised that the extra funds be spent prudently in order to put the economy on a long-term footing.

It added that these initiatives "should be complemented by pro-growth structural reforms, including measures to foster more innovation and digitalisation, cut red tape, reduce labour supply constraints... and deepen European economic integration”.

According to the institution's most recent predictions, Germany's economy will return to growth this year, with production of 0.2%, and accelerate in 2026, with a 0.9% gain.

However, critics are growing concerned about Merz's economic ambitions, claiming that public spending is moving too slowly and is misdirected, and that there is little emphasis on substantial reforms.

Merz defended his government on Tuesday against charges that it is moving too slowly, citing planned reforms in corporate income tax and industrial power costs.

"Germany is not a speedboat; Germany is a large ship," he said at an event held by the BDA employers' association.

"A ship this large cannot be turned around in a matter of days, like a speedboat turning 180 degrees in the opposite way. "It takes time."

Germany's economy has suffered in recent years as a result of the oil price shock caused by the Ukraine war, an industrial downturn, and increased competition in established industries, particularly from China.

The tariff assault undertaken by the United States—Germany's largest export market—has exacerbated headwinds.