Germany's 'wise men' predict debt increase of 3.2%

Germany's leading economists delivered a stinging attack on the government yesterday and predicted that German national debt would rise to 3.2 per cent of gross domestic product (GDP) this year.

The breach of the 3 per cent ceiling laid down in the Stability and Growth Pact was one of several gloomy predictions in the bi-annual economic forecast published yesterday by Germany's "six economic wise men".

"The economy in Germany remains weak. A gradual recovery can be expected in the course of 2003," said the report.

The economists called unemployment the most pressing problem facing Germany and said the number out of work would continue to rise, hitting 4.1 million next spring.

They predicted that Germany's GDP would grow by just 0.4 per cent this year and 1.4 per cent next year, significantly below their April prediction of 0.9 per cent and 2.4 per cent respectively.

The economists criticised the German government, accusing it of holding back economic recovery through new taxation proposals.

"The coalition agreement to raise taxes is exactly the opposite of what is needed," said the report.

It said the government was defying basic economic logic if it expected higher taxes to increase consumption and investment.

"The coalition plans will have the exact opposite result. Even short term, proceeding this way will leave skid marks on the economy. Long term, it threatens to slow the pace of growth."

At the press conference to present the report, one of the six economists put it more bluntly. "If you put together all the government's proposed measures, it could cost a half of 1 per cent of GDP growth next year," said Mr Joachim Scheide from the Institute for World Economy.

The economists forecast that after reaching 3.2 per cent this year, national debt would drop down to 1.9 per cent next year as a result of swingeing spending cuts.

But, like the German economy as a whole, this could change if the global economic situation worsens.

One economist suggested the only thing standing between Germany and recession was an international crisis, such as a war in Iraq.

"The insecurity is much larger than normal and no one, not even us, can foresee international crises and the consequences," said Mr Roland Döhrn of the Institute for Business Research. The report said that after the economic difficulties at the end of 2001, the economic situation in Germany had stabilised. Last April the economists said in their report that "the global economy is on the verge of recovery and the German economy will end 2002 in upswing". Yesterday they said the long-heralded upturn had failed to materialise.

The report poured cold water on the hopes of the Chancellor, Mr Gerhard Schröder, to get Germany back to work. He has promised to implement fully the proposals of a government commission to reform state employment offices and reduce the red tape surrounding employment.

But the effects of the proposals have been over-hyped, say the economists, and "the huge expectations for relief on the employment will not be fulfilled".