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To: c.hinton who wrote (24359)	4/30/2005 12:11:32 PM
From: c.hinton	Read Replies (1) \| Respond to of 108962

Germany puts its faith in Keynesian By Ambrose Evans-Pritchard (Filed: 30/04/2005) Germany is backing a 1970s-style Keynesian to take over the crucial job of chief economist at the European Central Bank, marking a dramatic shift in Berlin's economic thinking and horrifying the guardians of orthodoxy in Frankfurt. The post has been held for the last eight years by Dr Otmar Issing, a monetary hawk who has fought off political pressure for lower interest rates and sought to uphold the low-inflation traditions of the former Bundesbank. Chancellor Gerhard Schroeder now hopes to replace him early next year with Professor Peter Bofinger, the leading advocate of a ''New Deal'' spending blitz to cut unemployment and lift the country out of protracted slump. The government slashed its growth forecast for 2005 yesterday from 1.6pc to 1pc after a week of grim confidence figures from German industry. Morgan Stanley has warned that the country may already be in recession. The slot of chief economist is tacitly reserved for Germany under a deal giving the post of president to France's Jean-Claude Trichet. Mr Bofinger's call for a massive stimulus through extra public spending would appear to shatter what remains of the EU's Stability and Growth Pact, which limits budget deficits to 3pc of GDP. Germany's deficit is already expected to touch 4pc this year. A member of Mr Schroeder's Council of Economic Experts, he is a follower of Karl Schiller, the 1970s economy minister and patron saint of dirigiste demand-management - now broadly discredited among economists. His core argument - music to the ears of the trade unions - is that Germany's current focus on cutting labour costs is counter-productive and could tip the economy into a deflationary spiral. "Economics is half psychology. Without more demand, nothing can be achieved," he said. Dr Bofinger's past calls for easier credit suggest that he would shift the balance of thinking at the ECB towards lower interest rates. Earlier this week Berlin accused the bank of pursuing a "mistaken" monetary policy that was crushing German industry. Professor Tim Congdon, of Lombard Street Research, said a switch away from monetary orthodoxy could spell serious long-term trouble for monetary union. "The eurozone needs Keynesian public works programmes like it needs a hole in the head. Budget deficits are already far too high," he said. Until now, the ECB has followed strictly in the footsteps of the Bundesbank, although it has slightly eased its implicit inflation target from 1.5pc to nearer 2pc. The original six members of the bank's executive council were all hardline monetarists.