Experts give harsh verdict on Merkel's policies (FT)

Germany's top economists issued a devastating verdict on Wednesday on the policies of Angela Merkel, the chancellor, saying they had become hostage to "contradictory political interests".

The annual report of the "council of wise men" which advises the government underscores mounting disappointment among experts and business at the government's inability to use the strong recovery to push through reforms.

Economic policy was all the more "disappointing" because "the year 2006 offered not only good political conditions" for decisive reforms "but also the most supportive cyclical environment in years", the high-profile panel of five economists said.

In a move that will put further pressure on Ms Merkel, the economists warned that the window of opportunity to push through reforms was narrowing and would close by the end of next year.

"Those decisions that are not being taken next year are likely to remain unaddressed for the rest of this parliament's life, and that would be to the detriment of the common good," they said.

The report's harsh assessment, coupled with its optimistic view of the current economic rebound and a higher-than-expected growth forecast for next year, underlined the growing rift between Germany's robust performance as an economy and the lack of progress in structural reforms.

Germany's latest export statistics, also released yesterday, illustrated the recovery's strong momentum, showing a 6.6 per cent month-on-month rise in September. That brought the consolidated trade surplus of Europe's biggest economy to a seasonally adjusted €15bn ($19bn, £10bn).

Economists expect growth in the three months to October to match that of the second quarter, the strongest in more than five years. Unemployment has declined since the beginning of the year, while investment and production - although not consumer spending - have risen substantially.

In their report, the "wise men" predicted gross domestic product would rise by 2.4 per cent this year and by 1.8 per cent in 2007, exceeding the government's own estimate for next year.

The policy section of the 607-page report, however, attacked the government even in those areas where Ms Merkel and her Christian Democratic-led "grand coalition" could have credibly claimed a degree of success.

The rapid fall in the budget deficit, presented by the government as a big achievement, concealed a "persistent need for a further consolidation of public finances through spending cuts and tax privileges", the experts wrote.

They also dismissed the coalition's draft reform of the mandatory health insurance system, agreed after months of wrangling between the CDU and its Social Democrat coalition partners over the summer, as a "failure".

The draft reform of corporate taxation, which has drawn mildly positive reactions from business despite misgivings about a planned widening of the tax base, also came in for criticism.

Copyright The Financial Times Limited 2006