Growth Warning: Top German Economists Say Greece Is Lost

Published on Spiegel Online International, by cgh — with wire reports, October 11, 2012.

Several top German economic institutes on Thursday warned that German growth is slowing as the country continues to be hampered by the ongoing euro-zone debt crisis. And Greece, they say, will be unable to “free itself from its debt burden” and will need another haircut … //

… Bad News for Germany and Europe: 

Alternatives, however, are few and far between. And that, combined with the threat of further euro-zone turbulence, the report makes clear, spells bad news for both the German and European economies.

Specifically, the report forecasts that German economic growth for 2012 will only end up being 0.8 percent, slightly down from recent predictions, and that growth next year will likely be weak. Instead of the 2 percent previously forecast, the report released on Thursday now estimates GDP growth of just 1 percent in Germany in 2013. That growth, such as it is, will come almost entirely from exports, which are holding up, the report says.

But that is the best-case scenario, based on the assumption that the debt crisis in the euro zone does not worsen. The report’s authors, however, do not believe the worst has passed. “The current evaluation of the German economy is based on the assumption that the situation in the euro zone … will gradually stabilize and investor confidence will return. That, however, is in no way assured,” the report reads. “Downside risk dominates … and the danger is great that Germany will fall into recession.”

Furthermore, Germany’s top economic institutes made clear that they are dissatisfied with the steps thus far taken in the euro zone to solve the ongoing crisis. First and foremost, the analysts repeated a demand made in earlier reports that the euro zone come up with a framework for ensuring orderly bankruptcy proceedings for member states. “Domestic debate in countries like Germany and Finland has made it clear that there is a decreasing willingness to increase aid payments or make transfer payments,” they write. As such, they say “it makes more sense for creditors to take part in the costs of the crisis.”

Inflation Warning:

Report co-author Kai Carstensen, of the Kiel Institute for the World Economy, put it more clearly at the Thursday press conference. Referring specifically to the unlikelihood that Greece will be able to manage its debt burden anytime soon, he said, “it is time to draw the consequences: No to aid payments, yes to debt restructuring.”

The report was also heavily critical of the European Central Bank’s plan to purchase unlimited quantities of sovereign bonds from debt-ridden euro-zone member states on secondary markets. “The ECB is becoming the guardian of national budgetary policy and possibly even holds sway over the solvency of individual countries,” the report reads. “In addition to the bank’s independence, its credibility is also in danger.”

Furthermore, the report adds, such behavior could trigger high inflation, which would seriously damage the ECB. “Should higher rates of inflation result, it will be extremely difficult to re-establish the ECB’s credibility,” the report says. Still, for 2013, the research institutes forecast a modest inflation rate of 2.1 percent.
(full text).

Links:

Richard Falk and David Krieger’s ‘The Path to Zero’, on Huffington Post, Sept. 13, 2012;

Book: The Path to Zero: Dialogues on Nuclear Dangers, by Richard A. Falk (Author), David Krieger (Author), on amazon.

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