The Spring Meetings of the International Monetary Fund (IMF) and the World Bank in Washington, DC are over. "The global recovery continues, although growth remains moderate with uneven prospects," according to the communiqué issued by the International Monetary and Financial Committee (IMFC), the IMF’s policy steering committee. Large shifts in exchange rates and asset prices, high public debt, and geopolitical tensions were just some of the factors calling for "vigilance". The statement emphasised the long-term challenge posed by low potential growth in many countries.

© Simone D. McCourtie / World Bank

In a joint press conference with Federal Finance Minister Wolfgang Schäuble on Saturday, Bundesbank President Jens Weidmann pointed out the clear shift in focus since the previous meetings – in contrast to earlier meetings, this time neither Germany nor the euro area was at the centre of the debate. Weidmann attributed this to two key factors: a considerable upward revision of the projection for the euro area given the firming recovery, and the fact that monetary policy has gone as far as it can go, a view that is also shared by the IMF.

Demographic challenges

The second key outcome of the IMF and G20 meeting, according to Weidmann, was to increasingly call attention to the unintended consequences of ultra-expansionary monetary policy in all three major currency areas and to the continuing divergence of monetary policy paths in the foreseeable future. Such consequences include a high risk appetite in the financial markets but not in the real economy. Weidmann also pointed out the risks of significant exchange-rate shifts, the threat of a sudden reversal of capital flows and tendencies towards trade protectionism.

He also warned about the hazards of asking too much of, and also politicising, monetary policy, and of misaligned incentives in other policy areas, noting that monetary policy was regarded as a major policy instrument, and in some cases the only policy instrument available. In his view, this was also stirring a debate on central bank independence. The Bundesbank’s president mentioned another major issue that had come up time and again in the talks and debates over the past few days, known as the "new mediocre" – a situation of continued subpar growth. He noted that this rightly brought the topics of structural reform, supply-side bottlenecks and demographic challenges to the fore.

At a press conference on Friday, Weidmann had already rejected demands for Germany to expand its public investment considerably. He noted that, although there was certainly cyclical and structural room for boosting the aggregate volume of investment, various other quarters had witnessed bad investments and drastic budget overruns. He said that proposals aimed at planning and conducting investment more efficiently should therefore be expressly supported, and that identifying specific investment needs and pressing ahead with the appropriate projects efficiently and transparently was a central task for the future. However, Weidmann was sceptical of the idea of broadly circumventing budget rules in order to fund additional government expenditure by borrowing, calling Germany’s balanced budget a success. In his opinion, it would not make sense to call that success into question through substantial off-budget borrowing.

Euro depreciation plays something of a role

Weidmann also rejected proposals for economic policy measures to counteract the German current account surplus, which rose to 7½% in 2014, following 6½% one year earlier. Net exports were the main reason for these surpluses. Weidmann noted that German enterprises were very well positioned in the global sales markets and thus accordingly successful, and that the export surpluses were the outcome of countless, mostly private sector and free decisions taken by enterprises and consumers at home and abroad. Although Weidmann saw no signs of any government intervention, misaligned incentives or apparent market distortions which were artificially inflating German firms’ export surpluses, he stated that the euro’s depreciation was certainly playing something of a role, by making German products more competitive and tending to boost exports. Moreover, Weidmann added, the rise was also a consequence of the ECB’s extremely expansionary monetary policy, which the IMF and other parties had called for.

He rejected proposals to dampen the current account balance using, for instance, particular fiscal policy measures or through political pressure on the wage formation process, noting that, in particular, it would be absurd to discuss measures aimed at artificially weakening Germany’s competitiveness in order to reduce current account surpluses vis-à-vis the other euro-area countries.

IMF quota and governance reform was another topic covered at the Spring Meetings. The IMF already adopted a package of reforms in 2010, which were intended to give the emerging market economies a greater voice in the IMF. The reforms have not yet been ratified by the USA. The G20 finance ministers and central bank governors have now called on the IMFC to pursue an interim solution while, according to IMFC chairman Agustín Carstens, remaining mindful of the ambitious objectives of the 2010 reform. With regard to the discussions, German Federal Finance Minister Wolfgang Schäuble commented that no steps backward had been taken.