Camdessus Cites Challenges Facing Germany and EU

• Pages: 17-19

Page 17

While issues of the upcoming European economic and monetary union currently preoccupy Germany and Europe, globalization is simultaneously reshaping the world's economic and financial landscape. On January 10, in an address to the Christian Social Union at Wildbad Kreuth, Germany, IMF Managing Director Michel Camdessus outlined the challenges posed by globalization for Germany, Europe, and the IMF. The following summarizes his observations.

Germany's success in meeting the economic challenges posed after World War II-the need to recreate a viable currency, the necessity of reestablishing economic and social order, and the prospect of rebuilding Europe-augurs well for its future response to globalization, according to Camdessus. Germany's example has helped make monetary stability the cornerstone of European economic policy. Its development of a competitive market economy, coupled with a unique social partnership, has brought years of economic prosperity and social peace, and its steadfast commitment to the construction of Europe has helped promote peace, stability, and economic progress across the continent.

Globalization now seems to pose a threat preciselyPage 18 because it appears to challenge these accomplishments. Efforts to create a strong euro are coming to fruition at a time when the power of global financial markets offers new challenges for authorities responsible for macroeconomic policy. Now that developed countries have become accustomed to extensive social protection, globalization demands increasing flexibility. And while European policymakers are absorbed with preparations for the economic and monetary union (EMU), the global economy continues to evolve in a less predictable way: competition in global markets is intensifying, and trade liberalization and expanding capital markets make it easier to shift production to lower-cost locations.

But a country's relative appeal to investors and producers derives from many factors other than wage levels, and clearly Germany's macroeconomic stability, predictable exchange rate, open trade regime and capital account, productive labor force, and transparent regulatory regime work in its favor. A tradition of macroeconomic stability and industrial excellence, however, has not been able to compensate for structural rigidities-notably in the labor market-that make it difficult for Germany to undertake the necessary adjustments to sectoral shifts in production and employment. These...