ECB should tail off bond purchases: German experts

[Frankfurt] The European Central Bank's easy-money policy has let eurozone governments delay key reforms, a German expert panel said Wednesday, urging the Frankfurt institution to ease off the massive stimulus spending.

"The extent of monetary easing in the euro area is no longer appropriate given the region's economic recovery," the German Council of Economic Experts said in its annual report to Chancellor Angela Merkel.

"The ECB should slow down its bond purchases and end them earlier."

Under President Mario Draghi, the ECB has bought well over one trillion euros of government and corporate bonds in a bid to pump cash into the financial system.

Most analysts expect the central bank to extend the programme at its current 80 billion euro (S$122.32 billion) per month rate past the current March 2017 cutoff, as growth in the euro area remains tentative.

But the five "wise men" - who in fact number one woman among them - warned that the ECB has reduced pressure on governments to reform.

"Even the German government did not sufficiently use the positive economic growth of the past few years for market-oriented reforms," council chairman Christoph Schmidt said in a statement.

The experts predicted economic growth for the eurozone of 1.6 per cent in 2016 and 1.4 per cent in 2017.

Beyond the ECB, the experts warned that Britain's vote to quit the EU in June shows reform is needed in the 28-member bloc.

"There is cause for concern given the strengthening trend of EU-critical voices in some member states," they wrote.

Anti-EU sentiment was likely to increase without reform to give voters the feeling that their governments are in control, fixing the union's finances and addressing transnational challenges like climate change, migration and terrorism, they warned.

But they also defended key pillars of the European project including the "four fundamental freedoms" on the movement of goods, capital, people and services.

The experts also backed the hotly-contested CETA free trade deal with Canada signed by EU leaders last week, and recommended pressing ahead with a yet more controversial planned US free trade agreement known as TTIP.

At home in Germany, the experts predicted growth would slow to 1.3 per cent in 2017 after reaching 1.9 per cent in 2016, "primarily due to calendar effects".

They warned the government against increasing spending, advising instead that Berlin continue to pay down its debts, link the statutory retirement age to life expectancy, and make the labour market more flexible.

The last suggestion would also help to integrate the 900,000 refugees and migrants who arrived in Germany in 2015, the experts noted.

AFP