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Last Updated: Wednesday, 21 September 2005, 11:23 GMT 12:23 UK
Policymakers urge German reforms
Jean-Claude Trichet, president of the European Central Bank
Jean-Claude Trichet said German reform is key to euro zone growth
Germany must press ahead with economic reform whatever the complexion of its next government, European Central Bank president Jean-Claude Trichet has said.

Germany is facing political deadlock after no party won a majority in Sunday's general election.

Mr Trichet said that whoever ends up in charge of the next government must give priority to job creation and growth.

A top think-tank warned that consumer confidence could be damaged should a weak and unstable coalition emerge.

Poor productivity

The ruling Social Democrats SPD and the opposition Christian Democrats CDU, which won the most seats in the election, have opened talks with other parties about putting together a viable coalition.

Chancellor Gerhard Schroeder and opposition leader Angela Merkel have both proposed reforms to Germany's labour market in an effort to boost the country's sluggish economic growth.

Let's be as determined as possible for the necessary structural reforms
Jean-Claude Trichet, European Central Bank president

However, experts are worried that substantial reform is now unlikely after neither party received an overwhelming mandate.

Mr Trichet said continued commitment to economic reform in Germany was essential if the euro zone was to increase its poor growth rates.

Growth across the 12 nation bloc, of which Germany is the largest member, is expected to fall below 2% this year.

"Let's be as determined as possible for the necessary structural reforms that will foster more growth and job creation," he told The Irish Times.

'Reform consensus'

Separately, the head of the International Monetary Fund (IMF) as expressed optimism that Germany's next government will address the problems facing Europe's largest economy.

"I wouldn't be pessimistic," Rodrigo Rato, the IMF's managing director, told the Italian newspaper Il Sole 24 Ore.

"There was a consensus, at least among the two big parties, that reforms were crucial."

Shoppers in Wieden
If the new government falters, this could further unsettle consumers and above all investors considerably
Holger Wenzel, German retailers association

The German economy grew 1.6% last year, its strongest performance since 2000. However, the government has forecast that growth will fall back to 1% this year.

Economic research institute RWI Essen said on Wednesday that it expected growth to dip below 1% in 2005.

It warned of an economic backlash should a stable governing coalition not emerge.

"Should coalition-building talks drag, or if the new government falters because of a fragile or shrinking majority, this could further unsettle consumers and above all investors considerably," it said.

Christmas concern

German retailers, already suffering from a slowdown in activity, are worried that political uncertainty could have a knock-on effect on sales.

"If we don't have a stable government, there is definitely a danger it could negatively influence Christmas sales," Holger Wenzel, managing director of Germany's retailers association HDE, told Reuters.

The HDE is forecasting a 0.75% decline in overall retail sales this year.

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