The German government's team of five economic 'wise men' have predicted consistent economic growth, lower unemployment, and reduced budget deficits for 2010 and 2011. However, they have warned against sudden tax cuts.
The German Council of Economic Experts predicted on Wednesday that Germany's economy will grow by 3.7 percent in 2010, and by 2.2 percent in 2011 - a prognosis that even exceeds the latest official estimates from Chancellor Angela Merkel's government.
"The pleasing upward trend in the German economy offers the chance for a stable, if relatively flat, path of growth," the council's chairman, Wolfgang Franz said. "Also, the government is in a position to considerably bolster these chances with solid economic policies."
Increased consumption, investments and demand for German exports are fuelling the recovery, and should lead to reduced levels of unemployment and state borrowing, the experts said. However, they also cautioned that a repeat of Germany's so-called Economic Miracle in the post-war era was not on the cards.
The council, often referred to as the Five Wise Men of the Economy (in fact, one is a woman), was set up in 1963 to advise the government on economic policy.
"I think we are all delighted that the situation this year looks a lot more optimistic than last year," Chancellor Angela Merkel said on receiving the report, promising to continue with governent plans to save money.
"We are well aware that the structure of our current budget - designed as a response to the recent crisis with over 50 percent of spending going towards social security - is not a sustainable model for the future, especially considering our ageing population."
Taxation and borrowing
The government says reducing borrowing still takes priority over tax cuts
The chairman of the expert panel, Wolfgang Franz, told Chancellor Merkel that her government could support the fragile growth by issuing stricter regulations on the global financial sector and continuing to consolidate German overspending. He also issued two warnings to governments, employers, and trade unions - advising against "rash cuts in taxes" and "excessive increases in wages."
Tax cuts were a major campaign platform of Merkel's pro-business coalition partners, the Liberals (FDP), and the party - which is struggling in the polls - is keen that they are introduced sooner rather than later. Economic Minister Rainer Bruederle, a member of the FDP, told German public television on Wednesday that his party would be patient before cutting taxes, but the cuts would come.
"Not today, but soon. Because if the economy really does grow as predicted, then - after implementing the measures to balance the budget that we have made priority number one - there might be a bit of lee-way for some slight cuts in the middle-bracket." Bruederle said.
"But, as our coalition keeps saying, we must reduce the budget deficit as a short-term priority, and then think about taxation in the medium term."
Bruederle said that the government might be in a position to start the process by 2012 - especially in light of the panel's prediction that Germany might dip below the prescribed EU budget deficit limit of 3 percent of Gross Domestic Product in 2011.
But the economists see this matter very differently, arguing that there will be no room for tax cuts during the current legislative period (which ends in 2013), and saying it may not even be possible early in the next one. Instead, the group suggested that Berlin might be forced to raise taxes slightly in order to meet its target of cutting 80 billion euros in spending between 2010 and 2014.
Job market to grow
The Chancellor wants to target Germany's unemployment problem
The German economic experts also predicted reduced joblessness for 2011, with Germany set to dip below 3 million unemployed next year. Earlier in the week, buoyed by the prospect of good news from her experts, Chancellor Merkel told the Focus news magazine that full employment was a major goal for her government.
"I want to approach the goal of work for all, step by step," she said. "We must, and can, get these people back to work."
However, the Cologne-based Institute for Economic Research predicts that a rate of around 5 percent unemployment, meaning roughly 2 million Germans out of work, would be a more realistic goal in the foreseeable future.
"At that point the structural issues behind joblessness start to become a problem," the institute's president Michael Huether explained. "Things like a lack of qualifications, the unsuitability of candidates for the jobs on offer, and vice versa."
Economic envy in the English press
Germany is leading EU member states as the bloc struggles to emerge from recession - something which has caused the British media to take note in recent weeks.
As Britain's coalition government, elected earlier this year, looks to introduce tough spending cuts and jumpstart the faltering economy, more and more media outlets are reevaluating the merits of the relatively export-heavy, frugal economic policies which Germans call "Rhineland Capitalism."
Britain's new leadership duo are making drastic cuts for little reward
"A decade ago we considered the German economy a write-off. Now (Prime Minister) David Cameron looks to Angela Merkel for inspiration," a columnist at the left-leaning Guardian newspaper, David Gow, wrote in a recent commentary.
Germany only partially followed the Anglo-American movement towards dependence on the financial and services sectors in the latter half of the 20th century, preferring to maintain some industrial output and favoring a relatively cautious banking community. The decision was often derided as backward, and even harmful to less cautious Western neighbors, but now British commentators are asking whether the same caution has proved the key to a relatively swift recovery.
Even the conservative newspaper, The Times, has recently turned against the higher-risk capitalism favored in the English-speaking world, suggesting that Germany's export-heavy model is "leaving Britain behind."
Yet there are other voices in the UK, like London-based financial analysts Lombard Street Research, who point to decreasing demand in China and continued economic problems in the US and much of southern Europe, suggesting that this could mean that Germany's export-driven recovery might falter in the near future.
Author: Mark Hallam
Editor: Michael Lawton