German Central Bank President Rejects Recession Reports

News out of the International Monetary Fund this week rang alarm bells across Germany.

A report claiming the country was on the verge of recession sent politicians reeling and the country's financial gurus rushing to deny the charge. Leading the group was

German Central Bank President Ernst Welteke, who talked with DW-RADIO this week.

Do you feel the German economy is on the verge of recession or, worse, deflation as the International Monetary Fund recently warned?

No, I don't, but obviously the German economy is in a difficult situation. It is in a phase of mere stagnation, but economic indicators do not point to an imminent recession. However, further deterioration cannot be ruled out if bold economic reforms aren't implemented soon. And I also see no danger of deflation in Germany.

With many negative statistics these past months – from increasing unemployment to little or no growth – about the only good news seems to be low inflation and the strong euro. But there are, of course, those who worry about the euro's strength against the dollar. Are you happy with this strong euro or have we overshot the mark?

This is a difficult question and it's not easy to answer, but so far appreciation of the euro has had a limited impact on the competitiveness of German exporters. The lion's share of German exports go to the euroland and have no exchange risks. Many German companies have hedged their exchange rate risks for exports to other markets, and Germany's external competitiveness is still within its long-term average.

The appreciation of the euro has also had a positive economic effect. Lower import prices are increasing, the purchasing power of consumers and companies benefit from lower energy prices.

But a few exporters are beginning to weep, just a little.

Yes, that is correct. But we also had this situation when the euro was depreciating because then it was importers with huge concerns. It's obvious that the continuous rapid rise of the euro could negatively effect the competitiveness.

One of the pillars of the economy is of course the traditional strong exporting position, the other is the domestic demand. For months if not years, economists have been saying that Germany must do more to strengthen domestic demand as part of a more self-sufficient euro block . Do you agree that we need to do more for domestic demand and, if so, can this be brought about while the government is desperately seeking new sources of revenue to avoid falling foul of the Maastricht criteria on budget deficits?

When we look to the developments of the budget deficit, then there is an increase of public spending during the last few years. Given the rising deficit and the high-level of public debt, there is simply no room for maneuver. Structural reforms and sound fiscal policy are the only solutions to our difficulties.

The 3 percent limit on budget deficits laid out by the European Union's Maastricht Treaty will more than likely again be exceeded by Berlin this year. What is the solution? Is it to weaken the criteria or to tighten the fiscal situation here at home?

The latter one is the best solution. The Stability and Growth Pact is part of the foundations of the European economic and monetary union. To weaken the pact's criteria will damage this basis. Additional public expenditure financed by debts endangers monetary stability and are at the expense of future generations. In the present situation, we have to cut subsidies and review all types of expenditures.