German growth seen falling below 1 percent

AP News
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Posted: Nov 09, 2011 6:46 AM
German growth seen falling below 1 percent

Germany's economic growth will slip below 1 percent next year amid increasing global uncertainty and pressure on rich countries to reduce their debts, the government's panel of independent economic advisers said Wednesday.

The panel's annual report predicted that Europe's biggest economy will grow by only 0.9 percent in 2012. For this year, it forecast growth of 3 percent _ below last year's figure of 3.7 percent.

Germany's return to strong growth has been led by exports and improving domestic demand. But the economy is losing steam as the global outlook cools partly because of the debt troubles in the eurozone. The slowdown is evident in recent figures showing a sharp decline in industrial orders in September, and a smaller drop in industrial production.

In their report, the economists stressed Germany's "particular responsibility" to resolve the eurozone debt crisis even though any solution will "entail great expense and considerable uncertainty."

"Safeguarding the stability of monetary union is not only in the interests of Europe, it is also in Germany's own best interests," they wrote.

The economists gave a cautious welcome to the decisions taken by last month's European summit to put together a second Greek rescue package and increase the firepower of the eurozone rescue fund. But they said more will need to be done.

"If the current political uncertainty in Greece can be overcome, the decisions agreed in October 2011 should buy time," in a similar way to the European Central Bank's decision 18 months ago to start buying struggling governments' bonds, the report said.

Last year, it said, politicians failed to "make sufficient use of the respite" to tackle fiscal consolidation convincingly and shore up the financial system.

"They must not make that mistake a second time," the economists said.

They said one option for the longer term could be a "debt repayment pact," under which countries would set themselves binding debt limits, and debts above the 60 percent of GDP limit stipulated by European rules would be transferred to a common redemption fund with joint liability.

That drew a highly skeptical response from Chancellor Angela Merkel, who has staunchly resisted the idea of so-called "eurobonds" backed jointly by eurozone countries.

"Of course we will look at it, but I don't want to leave unmentioned the fact that we think it would require a large number of treaty changes, and that it isn't possible as such in terms of operative management," she said Wednesday as she was presented with the report. But she stressed Berlin's commitment to stemming the crisis.

"We believe that securing Europe and the eurozone and dealing with the debt crisis are the outstanding tasks, and also the precondition for entering a phase of stable growth," Merkel said.