MNI POLICY: Growth Dips, ECB Criticized By Germany's '5 Sages'

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank's slow path to normalizing

monetary policy may prove "too late" to permanently stabilize the euro, an

annual report by the German Council of Economic Experts warned Wednesday.

     The Council advised ECB head Mario Draghi to tighten monetary conditions in

the face of a "considerable increase" in inflation, and called on the bank to

"communicate an approach to reducing its balance sheet".

     It also revised down previous German GDP growth estimates to 1.6% for 2018

and 1.5% in 2019, a drop of 0.7 and 0.3 percentage point respectively. Global

economic growth is also likely to slow down, the Council said, with euro area

GDP growth forecast at 2.0% for 2018 and 1.7% for 2019.

     Here are the key points from the report:

     -- German economic growth is being negatively affected by temporary

production issues, capacity bottlenecks and multilateral global economic

uncertainty, not least from trade protectionism. A disorderly Brexit, a possible

resurgence of the euro area crisis and demographic change at national level also

present challenges.

     -- United States protectionism and the reactions of trading partners have

increased average tariff rates. The EU should consider retaliatory measures

under World Trade Organisation (WTO) rules to "credibly punish rule

infringements". The WTO should be reformed and thereby strengthened.

     -- The European Union should "take advantage of the opportunity to further

increase welfare and conclude new trade agreements, for example with the United

States". Adopting protectionist measures of its own is not in Germany's

long-term interests.

     -- Germany should continue economic reform, but refrain from adopting an

interventionist industrial policy. Proposals for taxing digital companies being

discussed at EU level should be rejected. Germany could consider lowering its

corporate tax rates.

     -- In Europe, high debt levels should be reduced and the obstacles to the

European Banking Union and the Capital Markets Union removed. Risk sharing

should be improved, the European Stability Mechanism strengthened and the Single

Resolution Fund backstop implemented.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$E$$$,M$G$$$,M$X$$$,MFG$$$]