BERLIN – Germany’s government must do more to cut spending to get its deficit under control as the economy is weakening faster than earlier expected, the country’s panel of independent economic advisers said Wednesday.
Germany’s economy, the continent’s biggest, will grow by only 0.8 per cent next year as Europe’s debt crisis weighs on its outlook, the experts predicted.
The government last month lowered its own 2013 growth forecast to 1 per cent from 1.6 per cent. It expects 0.8 per cent growth this year.
In its annual report, the group maintained recent plans by Chancellor Angela Merkel’s coalition government to increase social welfare spending ahead of next year’s national elections “go in the wrong direction” given the signs of financial trouble ahead.
“We need significantly more ambition in consolidating the budget,” the group’s chairman Christoph Schmidt told reporters after handing over its nearly 400 page annual report to Merkel. The government must show more spending discipline as the outlook is worsening, he added.
Merkel’s government has defended the plans, saying that even with the increased spending the country will have an almost balanced budget as early as 2014.
Schmidt warned the great efforts required to keep the eurozone’s debt crisis in check are diverting too much attention from necessary reforms and cuts in Germany.
Merkel’s centre-right government has urged its European partners to implement structural reforms and reduce spending, although it has not pushed through any significant budget cuts at home.
Instead, the country was able to reduce new borrowing thanks to a robust economy, low unemployment and lower interest payment costs because investors consider its debt a safe-haven.
But Germany, the world’s second-largest exporter, also depends on the health of its European neighbours’ economies, whose outlook is worsening.
The European Commission, the EU’s top executive body, lowered its growth forecast Wednesday, saying both the 17-nation eurozone and the wider 27-member EU will slip into recession this year, contracting 0.4 per cent and 0.3 per cent respectively.
Germany’s economy already shows signs of weakening.
Industrial production in September fell by 1.8 per cent, worse than market expectations for minus 0.6 per cent, according to new official data. Industrial orders also fell 3.3 per cent in September over the previous month, pulled down by drop in foreign demand.
The panel of economic advisers also cautioned that the bloc’s governments must continue to work on creating lasting solutions to overcome the debt crisis, saying that the European Central Bank has taken a too prominent role.
The ECB in September unveiled a plan to buy the bonds of struggling countries, lowering their borrowing rates, if they first agree to a European rescue program that includes conditions on their budget policies.
“The boundary between monetary and fiscal policy was blurred in a questionable way,” they said, warning the ECB’s bond-buying program must not become a permanent stabilization mechanism, but remain an emergency solution.
Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz