May 17, 2013 / 10:57 AM / 7 years ago

ECB's Asmussen: Germany must reform or be 'sick man' again

BERLIN (Reuters) - German ECB board member Joerg Asmussen German expects growth in his country to pick up in the second quarter but warned on Friday that Europe’s largest economy risked becoming the “sick man of Europe” again if it did not carry out further reforms.

European Central Bank (ECB) Executive Board member Joerg Asmussen attends an interview with Reuters in Berlin, February 22, 2013. REUTERS/Pawel Kopczynski

Germany earned that label a decade ago as it struggled with the cost of reunification. It has since become a rare island of prosperity in Europe, with unemployment of 6.9 percent which is close to the lowest levels in more than two decades.

Germany outperformed its peers in the first two years of the euro zone crisis, though with growth of just 0.1 percent in the first quarter of this year it only narrowly averted recession, after contracting by 0.6 percent in the fourth quarter of 2012.

“I think there is good reason to believe that the second quarter will be better than the first one,” Asmussen said.

As well as being an executive board member of the European Central Bank, Asmussen belongs to the centre-left Social Democrats (SPD), who are struggling to oust conservative Chancellor Angela Merkel in September’s German election.

He said Germany was reaping the rewards of reforms undertaken by previous governments such as the labor market reforms launched by former SPD chancellor Gerhard Schroeder.

“But if it does not continue to reform, it will be the sick man of Europe again in five to 10 years,” he said, singling out education, infrastructure and the complex tax system as some of the areas needing an overhaul.

“It is difficult to understand: if you buy a horse to ride it, you pay 19 percent value added tax. If you buy a horse to make lasagna, you pay 7 percent,” he said. “What about a horse that you ride for two years and then make into lasagna?”

Asmussen said the ECB would pursue an expansive monetary policy for as long as necessary after it cut interest rates for the first time in 10 months in early May.

“But we need to keep in mind that a long, permanent policy of low interest rates carries risks because it encourages investors to look for rising returns elsewhere and that can lead to a misallocation of capital,” Asmussen said.

The ECB member reiterated his belief that all elements of a European banking union should be completed by mid-2014 including a centralized authority for winding down troubled banks.

“A supervisor which cannot credibly close a bank because it doesn’t know what will happen then is a like a tiger without teeth,” he said at a media event in Berlin.

“We need all elements of a banking union - we need them on the level of a common instrument and I also think that we can do that by next summer if we work hard,” Asmussen said.

Reporting by Annika Breidthardt; Writing by Michelle Martin; Editing by Stephen Brown

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