09 December 2013

German Council of Economic Experts: Executive summary of the Annual Economic Report 2013/14

The German Council of Economic Experts released an English translation of the executive summary of the Annual Economic Report 2013/14. The summary provides an overview of the key points related to the main policy areas.

Key points:

1. 2013 Bundestag election campaign: Redistribution instead of genuine reforms

In the 2013 Bundestag election campaign the discussion about what economic policy strategy to adopt for the coming years was largely focused on domestic policy aspects. In contrast to earlier Bundestag election campaigns, this debate was conducted against the backdrop of Germany's favourable economic situation. In addition, all current forecasts indicate that we might now see the long anticipated economic upturn. This forthcoming improvement is due not least to the Outright Monetary Transactions (OMT) announced by the European Central Bank (ECB). Almost all parties obviously took Germany's strong economic situation for granted rather than seeing it as a result of the many effective reforms undertaken in the past, above all the Agenda 2010. The present economic situation and Germany's healthy position compared to the euro area's crisis countries seem to have obstructed many politicians' view of the major future challenges. Policymakers should be looking towards the future instead of pursuing this rather backward-looking economic policy.

2. Economic forecast

The uncertainty regarding the further direction of the euro crisis quickly diminished following the announcement of the OMT programme in September 2012. Moreover, the global economy stabilised during the course of 2013. The upturn now evident is, however, not yet able to sustain itself, because many advanced economies continue to have high public deficits and a very expansionary monetary policy is providing support.

3. Economic policy agenda: Avoid, safeguard, improve

The German federal government can only convince other European governments to assume national responsibility themselves and conduct the necessary reforms, if it adheres to this advice in its own national area of responsibility. The demographic change already underway is one of the biggest challenges for German economic policy. Germany should start preparing now for the resultant impacts. This had been the precise aim of many of the reforms implemented in the past, particularly the Agenda 2010 introduced ten years ago. Reversing or diluting a considerable part of these reforms now will burden future generations and weaken Germany as an investment location, thus decreasing potential growth and public financial viability in the long term.

4. The ECB as crisis manager

The ECB contributed to the calming on the government bond and interbank markets with its OMT announcement in the summer of 2012, but at the same time set misguided incentives for economic policy. The mutual dependency between banks and governments has actually increased with a rising proportion of government securities on banks' balance sheets. The market incentives for consequent continuation of fiscal consolidation have also been weakened. The ECB's low interest policy has thus far been in line with its historical reactions to inflation and growth forecasts. The ECB announced as part of its new "Forward Guidance" communication that it did not expect a key rate increase for "an extended period of time". Assuming that the ECB will react to inflationary and growth expectations as in the past, this period is unlikely to be longer than three quarters.

5. National responsibility and role model

For the umpteenth time since the European debt crisis began in 2010, monetary policy measures have managed to buy time. This must not lead to neglecting fundamental economic and fiscal measures. In fact, it lies with national policymakers to release the ECB from the role of crisis manager. The German government should counter the impression that it expects – or even demands – painful adjustment processes from other countries, but shies away from unpopular measures for Germany. In terms of European policy, the new German government should use two levers for improved economic policy: firstly it should systematically continue with its efforts to establish a stable architecture for the euro area, and secondly it should continue heavily to promote national consolidation and reform efforts, which benefit primarily the individual member states and enable them to escape from the crisis more quickly.

Full Executive Summary

© German Council of Economic Experts