German call for urgent EU-wide solution to boost growth

Berlin’s leading economic institute has called for pre-emptive investment via an EU fund to drive growth as Europe’s largest economy faces into a gloomy autumn.

Ferdinand Fichtner, chief economist at the German Institute for Economic Research (DIW), said a co-ordinated European response through investment bonds was urgently needed, given flat euro zone growth in the second quarter and a 0.2 per cent contraction in Germany.

Germany’s federal statistics office attributed the contraction largely to one-off effects such as a strong first quarter thanks to a mild winter.

But the DIW says action is needed given a difficult autumn ahead: ECB bank stress test results, ongoing Middle East and Ukraine uncertainty, and the first indication in third-quarter results of the cost of retaliatory sanctions imposed by Russia on the EU.

“What worries me more than this quarter are third-quarter figures coming in recently such as industrial companies’ weak order books,” said Dr Fichtner.

Possible recession

Two consecutive quarters of contraction would push Germany into recession, increasingly likely given the gloomy indicators.

Germany’s Ifo business confidence index has fallen to a nine-month low, while the Zew survey of analyst and investor expectations has fallen for eight consecutive months. German factory orders were down 3.2 per cent in June.

Rather than wait for disaster to strike, the DIW wants EU governments to set up a joint fund offering loans at favourable terms. This would give a shot in the arm to private-sector investment, the institute says, and reverse a long-running under-investment across the continent that was exacerbated by the euro crisis.

According to the DIW study, available in English on its website, EU investment is down about four percentage points since 2004. The Republic has the highest investment gap in the euro zone at 9.4 per cent.

“This is not about diverting investment into crisis countries but to bring the euro zone in total on a stronger foundation,” said Dr Fichtner. “Encouraging private-sector investment is better than the state getting involved directly, and the risk to the taxpayer is lower.”

Co-ordinated response

Such an EU-wide solution to a EU-wide problem, co-ordinated by the European Investment Bank, would, the DIW argues, prove more effective than national investment projects.

One such national project is the Strategic Banking Corporation of Ireland, making €500 million available to Irish SMEs with the backing of the European Investment Bank and German state-owned KfW.

The DIW proposal was welcomed by the Economic and Social Research Institute yesterday, pointing to the euro area’s pessimistic autumn outlook.

“A co-ordinated European response is required, with something significant, not piecemeal, to get growth rates up,” said ESRI associate research professor Kieran McQuinn. “Raising funds and finance sh- ould be done at a pooled basis.”

While greater co-ordination of European stimulus measures was overdue, he said much debate was required on whether such measures should be limited to the private sector or involve broader fiscal stimulus.

France used the flat euro growth this week to demand revised fiscal targets for the euro area – and for itself. But the DIW argues that relaxing the stability and growth pact would send a “fatal signal” to markets.

"This would give the impression that, although we have set up new rules, they only apply for as long we want them to, and we can circumvent or reverse them relatively quickly," said DIW president Marcel Fratzscher. "That would weaken the already fragile confidence in Europe and therefore the economy as well. It would be a measure that could fizzle out relatively quickly."