Tags: Europe | Financial | german | growth

Europe's Outlook Darkens as German Growth Fades

Thursday, 11 October 2012 08:33 AM EDT

Europe's economic outlook darkened further Thursday when top economists slashed their growth forecasts for Germany and warned that public support for financial aid for struggling countries was evaporating.

In a joint report for the Economy Ministry released Thursday, leading economic research institutes said they now expect gross domestic to increase by only 1 percent in 2013 instead of 2.0 percent. They said the financial woes of other eurozone nations were weighing on the currency bloc's largest economy, hurting business spending on new equipment and production facilities, a key component of growth.

They said that Germany risked a worse outcome if political leaders around the eurozone do not keep up their efforts to control the debt crisis. A new eruption of market tensions — which have calmed recently due to action by the European Central Bank — could make things worse. If the debt crisis should worsen and borrowing costs for troubled countries spike, they said, "there is a great danger Germany will fall into recession."

They also noted that patience was "evaporating" in Europe's richer countries such as Germany and Finland for continued financial support for indebted countries such as Greece.

The German economy is expected to keep growing mainly because exports are holding up well, the economists said. Meanwhile, financial market conditions are calmer after the ECB said it could buy government bonds issued by indebted governments such as Italy and Spain, if they promised to take steps to reduce debt. Such purchases would lower the high borrowing costs that threaten to push them to financial ruin.

"Over the course of the year ahead economic activity in Germany is expected to improve, since the situation in the eurozone should gradually ease and the rest of the world economy should gain greater momentum," they said in their twice-yearly report.

The report — prepared by Germany's top six economic research institutes together with one in Austria and another in Switzerland — also cut the forecast for 2012 German economic growth from 0.9 percent to 0.8 percent.

The institutes' economists said voters in more financially solid countries were getting restless about being put on the hook for bailout loans like the ones that rescued Greece, Ireland and Portugal. Domestic debates in Germany and Finland, where voter skepticism about bailouts runs high, "have shown that the readiness to increase assistance loans or make transfers is evaporating." That increases the importance of reforming economies to increase growth and reduce deficits.

European officials are currently deciding whether Greece has done enough budget-cutting and economic reforms to merit getting more money from its bailout loan.

The institutes warned that the ECB could not revive the economy by itself, and that its chances of lowering borrowing costs for governments and companies in the countries hit by the crisis will largely depend on whether politicians act. "The ECB's chances... will largely depend on whether economic policy can restore the confidence of financial investors, companies and households," the report said.

One of those government promises — to create a banking union that can take over the burden of rescuing lenders — is still months away from being put into action. German Chancellor Angela Merkel damped hopes that the banking union might be set up swiftly.

"Quality must always trump speed, and that also holds for example for the creation of a single (European) banking supervisor," Merkel said Thursday.

The institutes' economists also noted that the budget cuts governments are using to heal public finances will contribute to the slowdown in economic growth. They cautioned that "risks to stability remain high."

The report reflected common thinking among German academic economists, by putting stress on cutting spending as a precondition for investor confidence and stronger growth. That school of thought has clashed with views put forward by the International Monetary Fund and leaders such as Italy's Prime Minister Mario Monti, who caution that excessive austerity could make things worse and advocate a slower approach to cutbacks to avoid their deadening impact on growth.

The report also warned that ECB bond purchases and looser monetary policy could spur higher inflation — another frequent German concern — although their forecast for 2013 was a relatively moderate 2.1 percent rise in consumer prices in Germany.

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Europe's economic outlook darkened further Thursday when top economists slashed their growth forecasts for Germany and warned that public support for financial aid for struggling countries was evaporating.In a joint report for the Economy Ministry released Thursday, leading...
Thursday, 11 October 2012 08:33 AM
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