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FINANCE

Berlin balks at boosting IMF’s finances

Germany on Tuesday balked at increasing the resources of the International Monetary Fund, arguing it could encourage countries to count on being bailed out by the organisation.

Berlin balks at boosting IMF's finances
Photo: DPA

Axel Weber, the head of the Bundesbank, said the IMF’s proposal for a massive increase in its resources so that it could function as a credible global bank of last resort for countries was fraught with risks.

“We are not convinced that the IMF should assume a general insurance function for public sector liabilities. This would risk setting the wrong incentives both for borrowers and investors,” he said in a statement at the annual meetings of the IMF and World Bank in Istanbul.

“Moral hazard issues also arise from the vast increase in fund resources that is currently taking place,” said Weber, referring to the hazard of providing such secure insurance that the insuree believes actions have no risk.

Germany, Europe’s biggest economy at the 186-nation IMF, is the only major European country to date to oppose boosting the fund’s resources. It has a voting weight of 5.88 percent at the board of governors, where an 85 percent majority is required.

Some IMF member states have pledged to increase the Washington-based institution’s resources by more than $500 billions (€339.5 billion) to boost its lending capacity to countries hit by the global economic crisis.

Germany has lent €15 billion to the IMF under this commitment. The head of the Bundesbank, known as a monetary policy hawk, also suggested the IMF’s recent distribution of 283 billion dollars in special drawing rights (SDRs), its international reserve asset, “should be re-examined once the global financial system has recovered fully.”

“This increase should be viewed as a temporary measure, taken in response to extraordinary developments in the world economy,” he said. “Just as a sustained economic recovery will call for an unwinding of exceptional policy support, so the Fund should eventually prepare the ‘exit’ from its exceptional resources.”

Weber warned that the fund’s increasing buffers of resources should not “tempt” it to look for business beyond its mandate, noting the IMF is financed by the currency reserves of its members.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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