Crisis continues to smoulder: Joint analysis of the Macro Group

The German economy achieved only a weak growth performance in 2012. GDP grew by 0.7 % on annual averages and by just 0.4 % over the course of the year. The prospects during the forecast period are mildly optimistic. The global economy will initially pick up only slowly, but the growth dynamic is expected to be stronger next year, boosting German exports. In the wake of the apparent stabilisation of the Euro area, uncertainty will gradually dissipate and investors will increasingly drop their wait-and-see attitude. Private consumption will, moreover, bolster growth in both the current and the coming year. The Institutes forecast GDP growth of 0.9 % on annual averages this year, a figure which understates the underlying dynamic: comparing the fourth quarter of 2013 with that of 2012 growth will reach a very much more substantial 1.9 %. In 2014 GDP growth is expected to be 1.5 %. The unemployment rate will remain more or less unchanged over the two years, at 5.1 % and 5.0 % on ILO definitions and 6.8 and 6.7 % respectively on German national definitions. Medium-term simulations indicate that the German economy is likely to remain constrained by the impact of the euro area crisis for an extended period. There are two main causal channels: German exports to the euro area will continue to be squeezed severely by the austerity policies being pursued across Europe, and even in Germany fiscal policy is expected to be contractionary, dampening the growth of incomes and domestic demand. Growth is expected to average 1.3 % in the years to 2017. Alternative scenarios show that by means of expansionary policies, including a European investment programme, far more favourable results could be obtained in the euro area as a whole and its member states individually than in the baseline scenario.The recession in the crisis-hit countries and the current stagnation in the remaining EMU member states must be overcome and give way to economic growth strong enough to increase capacity utilization and reduce unemployment. The necessary process of deleveraging must continue and public finances be put on a sustainable footing. At the same time, current account imbalances must be reduced and the financial sector stabilised. The current economic policy strategy, consisting first and foremost of fiscal austerity and a monetary policy rendered ineffective by country-specific risks, will almost certainly be unable to generate sustained improvements in these four key areas.A necessary condition for exiting from the crisis is to make monetary policy effective once more by re-establishing confidence in the government bonds of the crisis countries. This must be accompanied by a turnaround in fiscal policy. Fiscal consolidation must occur in such a way that it does not impinge negatively on aggregate demand. The Macro group proposes a European investment offensive. The crisis countries should receive external financing equal to 1 % of current GDP for a period of five years. This should be used to finance public investment and/or support for private investment. Member States with current account surpluses, especially Germany, should implement expansionary fiscal policy measures representing at least 1 % of GDP, such that they play the role of locomotive for the European business cycle. .