The International Monetary Fund (IMF) said Wednesday that a surge in Germany's public spending must be accompanied by "pro-growth" reforms to ensure Europe's top economy makes a sustained recovery.
Chancellor Friedrich Merz's coalition is making huge extra outlays on infrastructure and defense, hoping for a turnaround after two years of recession.
After several of its officials visited Germany, the IMF praised the country's "landmark" decision this year to ease strict debt rules, which paved the way for a sharp increase in public spending.
This had "set the stage for economic recovery," it said in a statement.
But the financial institution called for the extra money to be spent wisely to put the economy on a sustainable long-term footing.
Germany was the only member of the G-7 advanced economies failing to grow for the last two years, and only modest growth of 0.2% is expected this year, according to the IMF forecasts. According to the institution's most recent forecasts, the economy is expected to pick up pace in 2026 with a 0.9% expansion.
The IMF also said the efforts "should be complemented by pro-growth structural reforms, including measures to foster more innovation and digitalization, cut red tape, reduce labour supply constraints... and deepen European economic integration."
There is growing unease about Merz's economic plans, however, as critics say public spending is moving too slowly, is being misdirected, and there is little focus on deep reform.
Merz on Tuesday defended his government against criticism that it is going too slowly, pointing to planned overhauls in the areas of corporate income tax and industry power prices.
"Germany is not a speedboat, Germany is a large ship," he told an event hosted by the BDA employers' association.
"A tanker of this size cannot be turned around in a matter of days, like a speedboat turning 180 degrees in the other direction. It takes time."
Germany's economy has suffered in recent years due to the energy price shock from the Ukraine war, an industrial slump and growing competition in traditional industries, particularly from China.
The tariff blitz launched by the U.S., Germany's top export market, has added to headwinds.
