Merkel Ignoring Risks in Feel-Good Economy, DIW Head Says

By Rainer Buergin

Chancellor Angela Merkel’s government is ignoring risks to Germany’s economic health and making a mistake by balancing the budget as the economy cools, Marcel Fratzscher, head of the DIW economic institute, said.
Germany’s economic strength relative to other euro-area members is giving the chancellor and her Social Democrat coalition partner a false sense of security, Fratzscher said in an interview. Merkel, whom Germans re-elected to a third term last year, has focused since then on redistributing wealth rather than pursuing pro-business policies, he said.
“The perception is that we’re doing so well that all we have to think about is how to share the cake and who gets which piece,” Fratzscher said in Berlin yesterday. Germans tend to think “structural reforms aren’t needed -- that’s something for our neighbors,” he said.
The comments add to criticism by the government’s council of
economic advisers, which urged Merkel this month to unleash market forces to spur growth and investment. The chancellor promised voters to balance the budget next year, and she has made concessions to the SPD by enacting easier early retirement and a national minimum wage. Germany’s first balanced budget since 1969 is scheduled for its final lower-house vote today.
“It’s important to do the reforms in good times and not wait until you’re the sick man of Europe with his back against the wall and no choice,” Fratzscher said.
Merkel has repeatedly warned of complacency even after the debt crisis waned and she dismissed criticism by economists that the planned introduction of the minimum wage on Jan. 1 is damping growth already now.

Lower Growth

Fratzscher, whose institute is part of a group that reviews the state of the German economy every six months, said the Berlin-based DIW may lower its outlook for Europe’s biggest economy from a forecast of about 1 percent growth for 2015.
Merkel’s economic advisers said Nov. 12 that German gross domestic product will probably increase 1.2 percent this year, compared with a forecast of 1.9 percent in March, and growth will slow to 1 percent next year.
Germany needs to spend more on infrastructure to support high wages that depend on exports of high-quality manufactured goods, Fratzscher said. Finance Minister Wolfgang Schaeuble’s plan for a 10 billion-euro ($12.5 billion) investment boost starting in 2016 is too little and came late, he said.
While Fratzscher said policy makers aren’t focusing enough on the risk of financial or political shocks in the euro area reigniting the crisis, Merkel regularly says it’s too early for Europe to relax fiscal rigor and that balancing the budget will help future generations.

Balanced Budget

“We need decisive action in overcoming the sovereign debt crisis,” she said in a speech in Berlin two days ago. “We have it under control, but we haven’t overcome it yet.”
Germany’s balanced-budget plan is “a fatal signal,” Fratzscher said. “It says: we don’t care what’s happening to the economy.”