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Europe's outlook darkens as German growth fades

Associated Press Modified: October 11, 2012 at 9:16 am •  Published: October 11, 2012

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.


Juergen Baetz contributed to this report.