Germany's economic growth predicted to slip to 0.9% in 2012, and could grow less or even contract if European debt crisis escalates, says government's panel of independent economic advisors
November 9, 2011
– Germany's economic growth will slip below 1 percent next year amid increasing global uncertainty and pressure on rich nations to reduce debts, the government's panel of independent economic advisers said Wednesday.
The economists said taming the eurozone debt crisis is critically important and suggested that, if existing plans don't work, a "debt repayment pact" including a fund jointly backed by eurozone countries could be set up. That drew a highly skeptical response from Chancellor Angela Merkel.
In their annual report, the five leading economists predicted that Europe's biggest economy will grow by only 0.9 percent in 2012. If the eurozone crisis continues to escalate, the German economy may only grow 0.4 percent, and could actually contract slightly if world trade stagnates, they added.
For this year, the economists forecast growth of 3 percent -- below last year's 3.7 percent.
Germany's strong growth has been led by exports and improving domestic demand. But the economy is losing steam as the global outlook cools, partly because of the eurozone debt troubles.
The economists' report stressed Germany's "particular responsibility" to resolve the eurozone debt crisis. The panel's chairman, Wolfgang Franz, gave a largely positive verdict on Merkel's firefighting efforts, viewed as too hesitant by many abroad.
"Viewed as a whole, the government has faced its responsibility for Europe," Franz said, adding that putting Germany on the hook quickly and without careful consideration for huge sums wouldn't have been in the country's interest.
The economists cautiously welcomed last month's decisions to put together a second Greek rescue package and increase the firepower of the eurozone rescue fund.
"If the current political uncertainty in Greece can be overcome, the decisions agreed in October 2011 should buy time," in a similar way to the European Central Bank's decision 18 months ago to buy struggling governments' bonds, the report said.
Last year, it said, politicians failed to "make sufficient use of the respite" to tackle fiscal consolidation convincingly and shore up the financial system -- and "they must not make that mistake a second time."
If their efforts fail to calm markets, the economists warned that constantly expanding the rescue fund "would come up against limits."
Eventually, they said the euro could be faced with the "dual danger" of an "uncontrolled collapse of monetary union" or "the original sin of unlimited purchases of securities" by the European Central Bank.
To avoid those dangers, the economists said one option could be a "debt repayment pact," under which countries would set themselves binding debt limits -- as Germany has done.
Debts above the 60 percent of GDP limit stipulated by European rules would be transferred to a common redemption fund with joint liability; countries would be obliged to pay them off over 20-25 years and would have to pledge part of their foreign exchange or gold reserves as security.
Merkel has resisted calls for so-called "eurobonds" backed jointly by eurozone countries, but Franz insisted the two ideas are poles apart. He noted that the debt redemption fund would wind itself up over time and come with "very, very restrictive conditions."
The chancellor was still wary.
"Of course we will look at it, but I don't want to leave unmentioned the fact that we think it would require a large number of treaty changes, and that it isn't possible as such in terms of operative management," she said as she was presented with the report.
But she stressed that "securing Europe and the eurozone and dealing with the debt crisis are the outstanding tasks."
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