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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

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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