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Germany must reform strict rules that limit borrowing in order to boost spending in key areas, otherwise Europe’s top economy risks further stagnation, an influential group of experts said on Wednesday.
The government’s council of economic experts also became the latest body to downgrade its forecast, and now expects German output to contract by 0.1 percent this year, compared to an earlier prediction of slight growth.
The world’s third-largest economy has been battling headwinds ranging from a manufacturing slowdown to weak demand for its crucial exports, and is on course to shrink for the second straight year.
“By international standards, Germany is lagging far behind economically,” said the five-member council in their annual report, stressing that “structural problems” were increasingly holding the country back.
The council, an independent group of economists that advises the government, said that years of underinvestment in key areas like infrastructure, education and defence were central to Germany’s problems.
Their comments reflect oft heard complaints in Germany: from the decrepit state of the railways to the threadbare condition of the armed forces and the slide of the country’s schools down international rankings.
Public spending focused on boosting the economy’s future prospects had been too low for years, especially when compared to the rest of Europe, the experts said.
They called for a reform of the so-called debt brake, which is enshrined in the country’s constitution and prevents the state from borrowing more than 0.35 percent of annual GDP to cover a structural deficit.
The strict rules were at the centre of a row over the budget that led to the collapse last week of Chancellor Olaf Scholz’s three-party coalition government.
There were sharp differences between the pro-business Free Democrats, fierce defenders of the debt brake, and Scholz’s SPD and the Greens, some of whose members had spoken out in favour of loosening the rules.
The council proposed an easing of the rules to allow the state to borrow up to 0.5 percent of GDP if public debt remains below 90 percent of GDP. If debt drops below 60 percent of GDP, this figure could rise to one percent of GDP.
While the current rules are aimed at preventing future generations from being saddled with high debts, they may ultimately find themselves “burdened by insufficient expenditure focused on the future”, warned council member Achim Truger.
“The debt brake does not ensure spending for the future is correctly prioritised.”
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