German advisers criticise government spending plans

Wed Nov 7, 2012 5:48am EST

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* Govt econ advisers: German economy to grow 0.8 pct in 2012/13

* Advisors criticise govt plans for more social welfare benefits

* Say ECB bond-buying must be "emergency solution" only

By Sarah Marsh

BERLIN, Nov 7 (Reuters) - Germany must do more to consolidate its budget given a darkening outlook, the country's panel of economic advisers said on Thursday.

The group, traditionally known as the "wise men", criticised the social welfare plans Chancellor Angela Merkel's cabinet agreed ahead of next year's federal elections.

The panel, which advises the government on economic policy, forecast growth for Europe's largest economy of just 0.8 percent this year and next, undercutting the government's forecast for expansion of 1.0 percent in 2013.

"The low-point of economic momentum in Germany will probably be reached in the fourth quarter," the advisers wrote in a nearly 400 page annual report. "We expect the German economy to pick up some steam again during 2013."

Germany's economy has remained resilient to the euro zone three-year old crisis and is even aiming to balance its budget in 2014 on higher tax revenues and lower interest it pays to service its debt deemed a safe-haven.

But it is now succumbing, as European demand for German products drops and uncertain firms put off investments, and many economists forecast a contraction for the fourth quarter.

Data this week showed Germany's private sector shrinking for a sixth straight month and industrial orders falling at their sharpest rate in a year.

Germany may have managed to consolidate its budget well this year but it cannot rely on strong tax revenue and "special factors" such as low interest on debt, the advisers warned. Moreover it will likely have to contend with rising spending in the future due to an ageing population.

"More ambition is necessary in consolidating the budget," they said. "Structural expenditure, such as childcare benefits, supplementary pensions or the scrapping of charges to visit doctors, go in the wrong direction."

Merkel's centre-right coalition reached agreement on Monday to scrap an unpopular health surcharge and to introduce extra child benefits, hoping this will bolster support in the countdown to elections, probably in September 2013.

The opposition denounced the deal as "horse-trading" between fractious coalition partners and said "taxpayers will be financing this election gift".

The advisers also warned that the European Central Bank's bond-buying programme must not become a permanent stabilisation mechanism, but must remain an emergency solution.

"The boundary between monetary and fiscal policy was blurred in a questionable way," the panel said, referring to the ECB's plan to buy up the bonds of struggling euro zone states.

"Given that this can only be an emergency solution, we still need a fiscal solution, as this panel has developed with the debt redemption pact."

The advisers last year called for the government to consider a European debt redemption pact, involving countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability.

They would commit to reforms and see their debts repaid over 20-25 years.

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