Economic slowdown

The German Council of Economic Experts predicts the nation's gross domestic product (GDP) will grow by just 0.9 percent in 2012 as uncertainty linked to the ongoing eurozone debt crisis takes its toll.

"Growth looks set to remain at a strong 3.0 percent in 2011. But the economy will weaken sharply in 2012 as the rebound comes to an end and the global economic environment deteriorates," the five independent experts, known as the "five wise men," wrote in their annual report.

The panel said exports - normally a major driver of German growth - would only increase by just 3.2 percent in 2012, down from 7.8 percent in 2011.

"The risks increased further in the autumn. The eurozone is caught in a vicious cycle of debt crisis and banking crisis," the panel said.

The independent forecasts were in line with the government's own projections, which said growth would slow from 2.9 percent this year to 1.0 percent next year.

Crisis management

In their report, the economists stressed Germany's "particular responsibility" to resolve the eurozone debt crisis, even though any solution will "entail great expense and considerable uncertainty."

The five experts praised Chancellor Angela Merkel's handling of the European debt crisis to date, but were cautious in their assessment of measures agreed at October 26 EU summit in Brussels.

"The current package is not a sustainable solution to the eurozone's problems," the panel said. "But it does open a window and give policymakers time that they must use decisively to create a political framework for the eurozone - one marked not only by solid state finances but also a stable financial system."

Redemption plan

The report proposed the creation of a 2.3-trillion-euro ($3.1 trillion) "redemption fund" to help governments reduce outstanding debts to less than 60 percent of GDP. The fund would be backed by member states' reserves and serve as an alternative to the European Stability Mechanism, a permanent rescue fund due to enter operation in 2013.

Eurozone nations should also introduce "debt brake" provisions to their constitutions to prevent further overspending, the panel said.

That proposal drew a skeptical response from Chancellor Merkel, who has staunchly resisted the idea of so-called "eurobonds" backed jointly by eurozone countries.

"Of course we will look at it, but … we think it would require a large number of treaty changes that aren't possible in terms of operative management," Merkel said shortly after she was presented with the report.

Author: Sam Edmonds (AFP, AP)
Editor: Michael Lawton