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Last Updated: Tuesday, 30 May 2006, 13:16 GMT 14:16 UK
Germany set for robust recovery
Worker rolls up a German flag
Exporters are helping fly the flag for Germany's economy
The German economy, Europe's largest, is due to enter a period of robust recovery, the Organization for Economic Cooperation and Development has said.

However, it will fail to maximise the potential for growth unless it pushes ahead with a reform of the labour market and reins in state spending.

Many of Europe's top nations are having to face up to the problems of an ageing population and changing world markets.

While many German voters accept the need for reform, many fear its effects.

A recent attempt by France to liberalise its labour market and make it easier for firms to fire workers led to street protests that prompted the government to abandon its plans in an embarrassing climb-down.

Germany's new government has so far faced an easier time, but both the state and the nation's largest companies now face a difficult period of negotiation.

Keeping it going

The OECD acknowledged that Germany had made major steps but at the same time called for greater efforts.

"After years of subdued growth and weak demand, Germany may now be in a position to enjoy a robust recovery," it said in its economic survey.

Wage rigidities need to be reduced further to fight very high unemployment rates among the low qualified

"Further progress in economic reforms could turn this cyclical upswing into a sustained expansion, with stronger supply conditions and higher permanent incomes feeding back into more buoyant current demand," it added.

German growth has bounced back and is expected to be 1.6% this year, in-line with state and market forecasts, the OECD said.

Last month, leading German economists raised their prediction for German growth in 2006 to 1.8% from their previous forecast of 1.2%.

However, expansion is set to slow to 1.5% in 2007, down from the OECD's earlier estimates.

'Deepened and broadened'

A key way of ensuring that the economy can react to a quickly changing business environment is to make the labour market more flexible, the OECD explained.

"Continued labour market reform can raise the economy's capacity to generate employment," the OECD said. "Wage rigidities need to be reduced further to fight very high unemployment rates among the low qualified."

"Labour market reform needs to be deepened and broadened in order to reduce hurdles to labour supply and demand," it added.

The government sees things the same way - although there are certainly differences of opinion on individual questions
Germany's Economy Minister Michael Glos

The OECD also backed plans by the German government to lengthen the amount of time a firm has to fire a new worker without giving due cause from six months to two years.

It also applauded plans to raise the retirement age to 67.

Point of view

One area that Germany has promised to focus on is trimming state spending, especially after its budget deficit topped European Union limits of 3% of gross domestic product.

The OECD said that government plans to raise value added tax to 19% from 16% would go some way to narrowing the shortfall, but said it was "important to make clear that further consolidation focus on the expenditure side".

Other areas that Germany needs to concentrate on include opening up its domestic markets to greater competition, limiting the role of the state in business, selling off of state firms and cutting the burden on entrepreneurs.

Germany's Economy Minister Michael Glos said that while the "government sees things the same way... there are certainly differences of opinion on individual questions".

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