Germany boosts eurozone

The German economy is recovering at a pace that will benefit the eurozone but will intensify competitive pressure on France to embrace more ambitious reform, according to reports prepared ahead of next week’s EU summit.

Michael Heise, chief economist of Allianz, the giant German banking and insurance group, in a report for the Lisbon Council think-tank, said far-reaching economic reforms, led by the corporate sector, could be transforming the medium-term economic outlook for Germany.

Heise told European Voice that Germany’s economic performance was already putting competitive pressure on other EU member states.

Heise said that the evidence suggested a potential for higher medium-term economic growth in the EU and that Germany had turned the corner and was heading for a higher level of productivity.

He estimated that labour productivity in German industry increased 6.6% last year and he expected a similar increase in 2007. This was more than twice the previous six year average, he said.

Productivity figures, especially over shorter periods, are notoriously unreliable, but Heise said that since productivity was rising so strongly at the same time as Germany was enjoying very strong employment growth this suggested that more than merely a cyclical rise in product-ivity was underway.

He said that the eurozone’s strong growth in productivity, notably in Germany, coupled with moderate inflation, should permit the European Central Bank to take a more cautious approach to raising interest rates.

Comments this week from Guy Quaden, the central bank governor of Belgium, confirming that the European Central Bank (ECB) was in a "strong vigilance" posture, were seen by private sector economists as indicating that the ECB would raise its policy interest rate from 3.5% to 3.75% at its meeting on 8 March .

Hans-Werner Sinn, president of the ifo Institute, the prominent German economic research body, echoed Heise in urging the ECB to be cautious.

Presenting in Brussels the latest CESifo report on the European economy, Sinn described the ECB’s policy rate as "high".

Sinn added that "due to difficulties in France and Italy rates should not be increased further for the time being". He described France’s overall growth performance last year as "meagre". "France does have a problem. It has been overtaken by Germany," he said.

On the brightening cyclical economic outlook for the EU, Sinn said that "the upswing in the EU business cycle is now so strong it will extend into next year", a view echoed in the spring economic outlook of the European employers federation BusinessEurope. It has raised its 2007 growth forecast for the EU27 by 0.3% to 2.6% and predicts growth of 2.4% in 2008.

BusinessEurope emphasised the beneficial effect for neighbouring countries of German economic recovery.

A sharp setback in global financial markets on Tuesday (27 February), following a plunge in the Chinese stock market will have served as a reminder to the Union’s policymakers that even the vigorous EU upswing would not be immune to a global recession.

The German economy is recovering at a pace that will benefit the eurozone but will intensify competitive pressure on France to embrace more ambitious reform, according to reports prepared ahead of next week’s EU summit.