Europe's outlook darkens as German growth fades

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By DAVID McHUGH and DAVID RISING, Associated Press

BERLIN (AP) — Europe's economic outlook darkened further Thursday when top economists slashed their growth forecasts for Germany and warned that public support for more financial aid to struggling countries was evaporating.

In a report for the Economy Ministry, leading economic research institutes said they now expect gross domestic to increase by only 1 percent in 2013 instead of 2.0 percent. They said financial woes in other eurozone nations were weighing on business confidence in the currency bloc's largest economy, hurting spending on new equipment and production facilities — a key component of growth.

Still, with six European nations in recession and the International Monetary Fund predicting just 0.2 percent growth for the eurozone next year, Chancellor Angela Merkel said it was incumbent upon Germany "to do things to stimulate the European economy."

"If we manage to keep our domestic consumption up, then that has of course the advantage that we can increase imports from other European Union countries,"she told reporters in Berlin.

The 17-country eurozone shrank 0.2 percent in the second quarter from the quarter before. Germany's economy grew 0.3 percent — not great, but it helped keep the eurozone downturn from ending up even worse.

The economic institutes said Germany's growth was at risk if eurozone leaders do not keep up their efforts to control the debt crisis, warning that new market tensions — which have calmed recently due to action by the European Central Bank — could make things worse. If the debt crisis should worsen, they said, "there is a great danger Germany will fall into recession."

The German economy is expected to keep growing mainly because exports are holding up well, the economists said. Meanwhile, financial market conditions are calmer after the ECB said it could buy government bonds issued by indebted governments such as Italy and Spain, if they promised to take steps to reduce debt. Such purchases would lower the high borrowing costs that threaten to push them to financial ruin.

"Over the course of the year ahead economic activity in Germany is expected to improve, since the situation in the eurozone should gradually ease and the rest of the world economy should gain greater momentum," they said in their twice-yearly report.

The report — prepared by Germany's top six economic research institutes together with one in Austria and another in Switzerland — also cut the forecast for 2012 German economic growth from 0.9 percent to 0.8 percent.

The institutes' economists said voters in more financially solid countries were getting restless about being put on the hook for bailout loans like the ones that rescued Greece, Ireland and Portugal. Domestic debates in Germany and Finland, where voter skepticism about bailouts runs high, "have shown that the readiness to increase assistance loans or make transfers is evaporating." That increases the importance of reforming economies to increase growth and reduce deficits.

European officials are currently deciding whether Greece has done enough budget-cutting and economic reforms to merit getting more money from its bailout loan.

The institutes warned that the ECB could not revive the economy by itself, and that its chances of lowering borrowing costs for governments and companies in the countries hit by the crisis will largely depend on whether politicians act.

One of those government promises — to create a banking union that can take over the burden of rescuing lenders — is still months away from being put into action, and Merkel damped hopes that the banking union might be set up swiftly.

"Quality must always trump speed, and that also holds for example for the creation of a single (European) banking supervisor," Merkel said.

The institutes also noted that the budget cuts governments are using to heal public finances will contribute to the slowdown in economic growth. They cautioned that "risks to stability remain high."

The report reflected common thinking among German academic economists, by putting stress on cutting spending as a precondition for investor confidence and stronger growth. That school of thought has clashed with views put forward by the International Monetary Fund and leaders such as Italy's Prime Minister Mario Monti, who caution that excessive austerity could make things worse and advocate a slower approach to cutbacks to avoid their deadening impact on growth.

The report also warned that ECB bond purchases and looser monetary policy could spur higher inflation — another frequent German concern — although their forecast for 2013 was a relatively moderate 2.1 percent rise in consumer prices in Germany.

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Juergen Baetz contributed to this report.

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