Economic reform a key issue for Germany

Major reforms are needed in the structure of the German economy to set it back on the path to growth, according to Dr Hans Tietmeyer, former Bundesbank president.

The need for reform in areas such as the labour market and social security were the key issues facing Germany, he said. Dr Tietmeyer, a director of Depfa Bank, was speaking to The Irish Times after the bank's annual general meeting in Dublin yesterday.

Questioned on predictions from some economists that Germany was threatened with lapsing into a period of deflation, Dr Tietmeyer said that "nobody can exclude" this possibility. However, he added: "I do not see the deflationary risk as the crucial point."

The key risk was of a continuation of low growth and high unemployment, he said. This threat was not caused by the stance of monetary or budgetary policy but rather by structural inefficiencies. A prolonged period of slow growth could increase the deflation risk.

The German economy is expected to grow hardly at all this year, according to most forecasters, and the government is currently putting forward a programme of economic reform.

"Germany is faced with a lot of problems," Dr Tietmeyer said, much of them resulting from the long-term impact of unification. Not enough progress had been made in reforming the welfare system, making the labour market more flexible and deregulating the economy, he said, and "if Germany is not doing the right job, this has negative consequences for Europe".

Dr Tietmeyer, a leading figure in EU finance in the 1980s and 1990s and Bundesbank president between 1993 and 1999, said that a lack of economic flexibility was evident in some other EU countries as well as Germany and needed to be tackled if the euro was to be a success.

"I hope the euro will, in the long run, be a success and not create conflict between countries," he said. To avoid conflicts in a single currency area, all countries must be flexible enough to deal with economic challenges, he said. This was "a big opportunity but a challenge too."

In the long term, the euro needed to be a strong currency based on a successful euro-zone economic performance, he said, rather than the current situation where euro strength was largely the result of US dollar weakness.

Questioned on UK Chancellor Mr Gordon Brown's statement regarding euro membership this week, Dr Tietmeyer declined to comment on whether - or when - sterling might not join.

He said he was "not surprised" the British government judged that the time was not right for membership. To join, Britain would need to meet the same criteria as other members, he said. These conditions included convergence in interest rate and inflation performances and low debt and deficit levels.

The conditions also specify that, before joining, a currency has to have a two-year period of relatively stable trading with the EU exchange rate mechanism, a condition that the UK government does not believe it should have to meet if it decides to join.