Fiscal Pact Deepens Euro Area Crisis

The German economy expanded vigorously in 2011; GDP increased by 3%. During the year, production reached its pre-crisis level. The outlook for 2012, however, is not favourable. Although the German economy will not slide into recession - unlike many other euro-area countries - declining demand within the euro area weighs on German exports and consequently on investment activity in Germany. The institutes expect Germany's GDP to increase by 0.3 % in 2012 on average. Unemployment will start rising during the course of 2012; the annual average will nevertheless decline slightly to 6.8%. Consumer prices will rise by 1.8 % in 2012 compared to 2.3 % in 2011. The outlook for 2013 is mixed: Exports to countries outside the euro area will rise more rapidly, whereas exports to euro-area countries will slacken further due to the severe austerity policies in the euro area. All in all, exports will be somewhat more vigorous and stimulate domestic demand and, in particular, investment. In 2013, the institutes expect GDP growth of 0.7 %. Unemployment will, on average, remain constant at 6.8 %. Consumer price inflation will stand at 1.3 %, thereby remaining well below the target rate of the ECB. Simulations of the medium-term development of the euro area show that the simultaneous implementation of supply-side oriented adjustment programs widens the rift between the southern member states and Germany. To overcome the crisis in the euro area expansionary demand-side policies need to be reinstated as part of the economic policy agenda in Europe.