German ‘wise men’ sound alarm over ‘overheating’ economy

Construction workers prepare concrete formworks in Berlin
Construction workers prepare concrete formworks in Berlin, Germany May 17, 2017. REUTERS/Hannibal Hanschke

November 7, 2017

BERLIN (Reuters) – The German economy is at risk of overheating, according to a leaked advisory council report that follows pressure from the Bundesbank for a swifter end to the European Central Bank’s expansive monetary policy.

In their annual report, seen by Handelsblatt newspaper, the five “wise men” who advise the German government on economic policy said the economy, which they expected to expand strongly this year and next, was moving gradually into a “boom phase”.

“There are clear signs that economic capacity is over-utilised,” read the report, which is due to be published on Wednesday.

Germans have been among the foremost critics of the ECB’s bond-buying program, which was introduced three years ago to depress borrowing costs and reignite growth in the euro zone’s heavily indebted southern periphery.

The wise men expected Germany’s economy to expand by 2 percent this year and by 2.2 percent in 2018, Handelsblatt said.

With unemployment at its lowest level since the early 1990s, Germany’s circumstances are very different from Italy’s or Spain’s, straining the ECB’s ‘one-size-fits-all’ monetary policy.

ECB President Mario Draghi last month announced a halving n the size of its 2 trillion euro bond-buying program, but this is far from the return to conventional monetary policy many Germans, including Bundesbank president Jens Weidmann, demand.

Without an intervention to cool the economy, Germany’s hawks fear the buoyant economy could tip over into an inflationary cycle.

Last week, a senior official from Chancellor Angela Merkel’s conservatives warned that German savers would not tolerate continued low interest rates for much longer.

(Reporting By Thomas Escritt; Editing by Paul Carrel and Gareth Jones)