German economic advisers attack ‘spendthrift’ incoming coalition

Germany’s state economic advisers yesterday dismissed recapitalising EU banks from the European Stability Mechanism bailout fund and attacked as spendthrift the spending plans of Berlin’s incoming grand coalition.

As coalition talks continue, Germany’s so-called five economic wise men – in fact, four men and one woman – expressed concern yesterday that Christian Democratic Union leader Dr Angela Merkel’s third administration would be more interested in economic redistribution than ongoing reform.

"We're warning against watering down or rolling back reforms of the last years, what we need is economic growth and sustainable public finances," said Dr Christoph Schmidt, the chairman of the committee that provides seasonal economic reports to the federal government.

Challenges
The looming challenges facing Germany, in particular involving its demographic make-up, would be more difficult to master, he warned, if the new government watered down decade-old economic reforms. "Redistribution and taking it easy on past successes won't work," he added.

The 500-page report, the wise men's most critical in years, attacked €20 billion in proposed additional pension spending. Four of the five economists also attacked as "frivolous" Social Democrat (SPD) demands for an €8.50 statutory minimum wage as a condition for joining a new coalition. The economists warned the move risked destroying jobs, particularly in eastern Germany.

Dissension
Economist Peter Bofinger said €8.50 was manageable as a minimum wage, however, pointing out that Germany is one of the last western countries not to have one.

“There are many studies for Germany which show there would be no effect on the labour market,” he said.

The economists backed Berlin’s strategy for a strict “liability cascade” to ensure creditors and owners of failing banks are tapped first for funding, then national governments and, only in the medium or long-term, European funds.

If the looming European bank stress test reveal gaps in bank finances, they said, the ESM fund should only be tapped as a last resort, with national governments acting as guarantors. “We are against a direct recapitalisation of banks via the ESM and we think, in the medium to long term, we won’t have the conditions for this,” said Prof Claudia Buch.

The economists forecast a brightening in Germany’s economic prospects next year: 1.6 per cent after growth of just 0.4 per cent this year.