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Top economists take aim at Merkel government

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Top economists take aim at Merkel government
Chancellor Merkel receives the report from Prof. Christian Schmidt
12:51 CET+01:00
Germany's "economic wise men" had harsh words for the coalition government led by Chancellor Angela Merkel in their annual report.

"The Grand Coalition has failed to create an atmosphere of economic ambition," president of the five-strong board - which actually includes one woman - Professor Christoph Schmidt wrote.

"It's already become quite clear that the current measures are increasing the need for reforms in future," Schmidt added, saying that the government wasn't supporting the strengths of the country's economy.

The economists cut their forecasts for economic growth to just one percent for 2015, significantly lower than the government's own estimate of 1.3 percent.

And they believed that 2014 would show overall growth of 1.2 percent, disappointing compared with last year's prediction of a 1.9 percent increase in activity.

Nevertheless, some of the government's own economic policies, such as the pension reforms, also contributed negatively to the outlook, the experts argued.

"Geopolitical risks and the unfavourable development in the euro area both played their part here," the report said.

Merkel fights back

Merkel was quick to reject the economists' biggest criticisms of the Christian Democratic Union (CDU) and Social Democratic Party (SPD) alliance voted in last September.

"It's not very simple to understand how a decision that hasn't yet been implemented can be slowing down the economy," Merkel said of their attack on the introduction of a minimum wage from next year.

The Chancellor said the main reason for growth slowing in Germany was the impact of global crises, such as those in Ukraine and the Middle East, rather than the government's reforms.

She also pointed to a €10 billion investment programme into infrastructure, research and education, recently announced by Finance Minister Wolfgang Schäuble, as evidence of positive government intervention in the economy.

But Merkel said she and her ministers would engage "constructively" with the economists' recommendations.

Fiscal credibility

"There are indeed some indications of weakness in public investment," the sages wrote in their report.

However, they urged the German government not to abandon its target of a balanced budget next year, arguing that its fiscal credibility is at stake.

The government "should not use the room it has within the framework of the debt ceiling because the credibility of its fiscal rules is not yet secured," the report said.

The favourable budget situation was partly due to unusual circumstances, such as low interest rates and high employment.

Instead of expanding investment, Berlin should "re-prioritise" its budget, they argued.

At the same time, there was "no evidence of a pathological weakness in private investment," the report added. "Instead, the government should improve the conditions for private investment and innovation."

Easy money from the ECB

The panel also hit out at the European Central Bank (ECB)'s ultra-expansive monetary policy, including a contested programme of asset purchases.

The moves "harbour dangers for the euro area economy in the long term," the experts said, arguing it would take the pressure off member states to pursue economic reforms and get their public finances in order.

Such criticism of the ECB is nothing new in Germany, with even the Bundesbank (German central bank) warning of the potential dangers of monetary policies that are too accommodative.

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