Experts see slow German recovery

Germany will breach the Stability and Growth Pact for a third time next year but will also begin a slow economic recovery with growth of up to 1.7 per cent, according to Germany's so-called "five wise men" panel of economists, writes Derek Scally, in Berlin

The experts forecast minus zero economic growth this year, meaning stagnation or even a slight contraction for the economy, in their annual report yesterday.

They also had qualified praise for the reform programme of the German government.

"Hopes for next year are based on a continuation of the global recovery and that the spark from foreign demand also ignites the domestic economy," said the five economists, speaking of a "recovery with the brakes on".

They predicted that any such economic upswing would not be strong enough to seriously reduce unemployment, which will average at 4.38 million or 10.5 per cent this year and rise to 10.6 per cent next year.

They also forecast that the German federal deficit could rise as high as 4.1 percent of GDP next year, well above the euro-zone guidelines.

Germany and France are likely to have deficits that far exceed 3 per cent of GDP this year and next, and both countries would like a more flexible interpretation of the euro-zone rules.

But the five wise men said they didn't think any "radical reform" of the budget guidelines of the Stability and Growth Pact was necessary, and urged the European Commission to deal with pact breaches appropriately.

Reforms of the employment market and welfare system were praised as "more than a first step in the right direction". However, the economists were critical of the "chaos" surrounding tax cuts worth over €15 billion.

The government hopes the tax cuts will increase spending and boost the economy. But the tax cuts are in limbo after being vetoed last week by the opposition conservatives in the upper house, the Bundesrat. Now a mediating committee is working frantically to present compromise proposals before Christmas.

"A lot of current tax politics is a mess," said the report. "This chaos is poison for a strong economic recovery off its own back."

As a result of the chaos, the tax cuts were likely to only boost the economy by up to 0.5 percent, they said.