The Organisation for Economic Co-operation and Development (OECD) said growth in Germany would pick up from 1.3 per cent this year to 2.3 per cent in 2000 and 2.5 per cent the following year. But the Paris-based think-tank said this was below potential because of the lack of labour market flexibility.
The report concluded that changes in economic policy since the departure of former finance minister Oskar Lafontaine had "contributed to an improved investment climate". There were further signs confirming the economic pick-up yesterday, with new figures showing a sharp rise in manufacturing production in October.
Nevertheless, the OECD's criticism of some of the policies of Gerhard Schroder's government was outspoken. In particular, its policies had reduced labour market flexibility, the report said.
The economists singled out government proposals to make it easier for unions to challenge in the courts wage deals at individual companies which breached collective agreements - a practice becoming more widespread, especially in the east, to save jobs. The government proposals "need to be resisted," the report said bluntly.
There was an urgent need for Germany to introduce greater flexibility, lower costs and less intrusive regulation in order to tackle the unemployment problem, it concluded. Another priority was the continuing effort to reduce the government budget deficit, which would still be too close to the 3 per cent of GDP ceiling even if last June's austerity package were fully implemented.
The report also criticised the government for reversing earlier reforms of the pension system which had been designed to tackle the ballooning pension bill. For example, it decided not to raise the retirement age.
Other aspects of policy came in for praise, however, especially a package of tax reforms which cut personal taxation and widened the corporate tax base. "The proposed reform represents a long-overdue move towards a more neutral tax system," the report said, although it added that some measures would discourage equity investment and venture capital.
Product markets had also become more competitive and efficient thanks to privatisation and deregulation.
A separate OECD report said the Japanese economy had turned the corner but the recovery was fragile. "Modest growth may have settled in during the second half of 1999," it said.
The government would need to repeat in 2000 this year's boost to the economy through higher public spending and tax cuts. But this ideally would be the last before the government could start to improve the long- term state of its finances from 2001.
Repeated fiscal boosts have massively increased Japan's national debt. The OECD recommended tax reforms, to broaden the tax base, and the phasing out of the country's wide range of subsidised credit guarantees.
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