German economy bucks euro zone trend

GERMANY’S ECONOMY continues to pull away from the rest of the euro zone, with leading economists forecasting 0.9 per cent growth this year.

With most euro countries in recession or heading that way, German economists said Europe’s largest economy was bouncing back to health, with companies “more competitive than they have been for 30 years”.

In their spring report for the federal government, the so-called “economic wise men” warned that the euro zone crisis had not gone away and expressed concern that the European Central Bank had undermined its independence with its ad-hoc crisis measures.

“Growth impulses in the German economy will win the upper hand this year,” said the economists.

After a “lull” in which the economy contracted 0.2 per cent in the last quarter of 2011, Germany returned to growth early this year – avoiding recession, defined as two consecutive quarters of negative growth.

Germany’s labour market situation is expected to continue to improve this year. Unemployment is forecast to drop to a record low of 6.2 per cent in 2013.

Consumer confidence remained at a one-year high this month, the economists said, and growth projections for next year were increased to 2.3 per cent – from an autumn forecast of 1.8 per cent.

Continued low interest rates, falling unemployment and steady growth in demand for its products cemented Germany’s reputation as a “safe investment harbour” in the choppy euro zone seas, they said.

German chancellor Angela Merkel’s government has just signed off on budget projects for the coming years that will see Berlin in effect eliminate deficit by 2014 – two years ahead of a deadline it anchored in the constitution.

However, the economists said this was “solely down to economic recovery” and criticised the Merkel administration for not doing more to consolidate the budget in a strong economic cycle.

The economic wise men said the euro zone crisis remained the greatest threat to German economy. They expressed concern that the ad-hoc measures adopted by the ECB – in particular the special long-term refinancing operations – had “put at risk the independence and integrity” of the central bank.

It was not clear, the German economists warned, whether the ECB could extract itself from the €214 billion worth of government bonds it had bought from crisis-hit euro zone countries to drive down interest rates.

“There is a danger that the finance policy will not be able to free itself from the predicament into which it has manoeuvred itself,” the report added.

Their concern will be grist to the mill of German critics who say the ECB is indirectly providing fiscal aid to governments, despite a ban on the practice in EU treaties.