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Germany

Expert Panel: No Growth Ahead as Germany Nears Recession

Zero -- that's the amount of growth five leading economic institutions say Germany can expect in 2009. They recommend more deficit spending, but can that turn around an economy on the verge of recession?

Full car dealer lot with sale sign

Dealers are already giving deep discounts on cars, fearful that next year could see sales stagnate

People were expecting the report issued on Wednesday, Nov. 12, by the "five wise men" -- as the German Council of Economic Experts is known colloquially -- to be bleak. And it lived up to its advance billing.

"The shock waves emanating from the financial crisis have fully hit the German economy," wrote the experts at the beginning of the report. "After a surprisingly good start in the first quarter of 2008, the situation has become so gloomy that Germany is on the edge of recession."

Germany experienced negative growth in the second quarter of 2008, and if data to be released on Thursday confirms that the economy shrank in the third quarter as well, Germany will officially be in recession.

And the new year, the experts said, won't bring any immediate relief.

"Gross domestic product may have increased by 1.7 percent in the ongoing year, but 2009 will bring stagnation in economic output," the Council concluded.

The Council put the blame for the economic downturn squarely on financial markets inside and outside of Germany. Although the property market was nowhere near as overheated as in the US or Britain, for example, the experts saw no chance that the German economy could escape the negative pull of the global financial crisis.

Where to next?

A display shows the price of Volkswagen at the stock exchange in Frankfurt

The numbers, say those who should know, aren't going to be good

The report was generally positive about the government's short-term attempts to stave off an acute financial disaster and encouraged Berlin to focus on restructuring financial institutions.

But the experts also came out against across-the-board bailouts.

"It would be wrong to keep the greatest possible number of banks alive at any cost," the report recommended, adding that the Swedish government's response to Sweden's banking crisis in the 1990s could serve as a model.

Nor did the experts have much good to say about neo-socialist calls for the state to permanently alter the system and become more involved in financial markets.

The goal, the report said, was to use restructuring to restore "an efficient and competitive" banking landscape in Germany.

"That presupposes that the state backs off after a successful process of stabilization and restructuring, and concentrates on its core tasks," the Council concluded.

Run up some debt

Work being done on an Autobahn

Germany, say the five wise men, needs more projects like this

On the issue of economic stimulus, the experts reversed the trend of recent years and said Germany should no longer prioritize a balanced budget.

Instead, the experts recommended, Berlin should try to stimulate internal consumer demand and pump money into public-works projects.

"There are good arguments for expanding net public investments next year and financing them with a higher deficit," the report asserted. "Particularly suitable are already approved public projects in transportation infrastructure, which have been delayed due to lack of financing."

The report also said that the European Central Bank should lower interest rates.

The experts did hold out some hope that falling oil prices might help boost the German economy in the latter stages of 2009 -- but not enough to get the country growing again.

On Saturday, leaders from the world's biggest economies convene in Washington to discuss global solutions to the financial crisis and the economic problems it has created.

But if the Council of Economic Experts is right, Germany is still going to be in for a long and bumpy ride in 2009 -- roads or no roads.

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