Journal Issue

Statement by the Staff Representative on Germany Executive Board Meeting, July 10, 2015

International Monetary Fund. European Dept.
Published Date:
July 2015
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This statement provides information that has become available since the issuance of the staff report. The information does not alter the thrust of the staff appraisal.

Following the expiration of the European program with Greece last week, the risk of renewed stress in the euro area has increased. So far, the reaction of financial markets has been relatively muted and contagion has not been significant. The yield on the 10-year Germany government bond has fallen by 26 basis points since the issuance of the staff report, reflecting safe haven effects. The DAX stock market index has declined by 6 percent, with bank stocks especially hard hit. CDS spreads for the largest four banks have increased by 14 basis points on average.

For Germany, the main short-term risk is that turmoil will spread and undermine confidence in the economic expansion. This would likely weaken private consumption and delay the projected recovery in private investment. Successful management of this risk will depend on the timely deployment of the available ECB policy tools. In the medium-term, there is a need for a concerted effort to accelerate integration within the euro area and strengthen firewalls. The upcoming euro area Article IV report will elaborate on these policy challenges.

The Financial Stability Committee (FSC) has recommended an expansion of the German macroprudential toolkit, in line with staff’s advice. Following its June 30, 2015 meeting, the FSC recommended that the Federal government initiate legislation to give the Federal Financial Supervision Authority (Bafin) authority to introduce measures constraining mortgage loan eligibility, such as limits of loan-to-value ratios, debt-to-income ratios, and debt-service-to-income ratios, as well as minimum amortization requirements. The Committee underscored that activation of such instruments is not envisaged at the moment.

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