MNI INTERVIEW: German Experts' Council May Cut Growth Forecast

--Council Chairman Lars Feld Says Risk Scenario Already Reached

--Second Covid Wave Could Prompt "L-Shaped" Economic Path

By Luke Heighton

     FRANKFURT(MNI) - The German Council of Economic Experts may cut its growth

forecasts, chairman Lars Feld said in an interview with MNI, after previous

estimates proved "too optimistic" and amid fears of an "enormously damaging"

second wave of Covid-19 infections.

     The Council's baseline scenario in March was for GDP to contract by 2.8% in

2020 and expand by 3.7% in 2021. However, a longer domestic and global shutdown

and differences in the speed of reopening and recovery means the 'risk scenario'

of a decline in output of at least 5.5% has already been reached, Feld said,

leaving a 6.3% GDP reduction this year "much more probable."

     "If we had to shut down again later in September or October to the same

extent as we did in April the damage would be enormous," Feld said, "and a

V-shape or a U-shape would not be feasible any more. It might rather be a W or

even an L in this case. But if we can avoid the second wave, and if a

large-scale bankruptcy of many firms in the German economy can be avoided, then

we have a higher probability of a V."

     Feld approved of fiscal measures already taken by the federal government,

and added in the conversation on May 12 that a post-crisis German GDP-to-debt

ratio of 68-70% may be more likely than the official estimate of 75%. In either

scenario, he stressed, there remains "enormous fiscal space if needed for

expansionary fiscal policy" in 2021.

     --MORE AID FOR COMPANIES

     Any discussion of post-crisis tax increases or austerity measures is not

"useful at the moment" Feld said, adding that he would prefer to increase

spending "on social policy grounds, perhaps on families with children. More

importantly, however, would be tax measures. What I'm thinking of in particular

are less restrictive, more generous loss-carry backward provisions for firms,

which would provide them with liquidity."

     Feld does not anticipate any fundamental change in German attitudes towards

balanced budgets once the current crisis has passed.

     "I don't think that there is going to be a greater tolerance of debt

afterwards," he said. "We [the Council] have always argued that the fiscal space

for investment without additional government debt is large. When you think about

the additional spending on social transfers, the government could instead have

used this money for infrastructure spending."

     --EXPORT-BASED MODEL

     Feld is "basically in favour" of maintaining Germany's current,

export-based economic model. But the world after the pandemic crisis will

"necessarily will be different," he said, and the different timings of

recoveries in the U.S. and China "calls for an adjustment of the way we think

about economic development in Germany [...] such that firms in Germany realise

that they have to have a diversification of their supply chains."

     "An expansionary fiscal policy must ensure that each euro spent is most

effectively inducing economic activity in Germany," he explained. "It might be

more expensive for the federal finance ministry to do more general measures than

to do a cash-for-clunkers scheme, for example, but it is more effective than

supporting particular industries that have the strongest interest group

representation at the federal level."

     Equally, Feld said, it is important that key structural reforms begun by

the German government before the crisis struck - digitisation and the climate

package in particular - continue once it is over. But he was "not so sure we

should endorse the more ambitious climate policy goals of the European

Commission. I was not in favour before the pandemic, and I'm not in favour of it

now. But carbon pricing schemes must continue to be established and to work

better."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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