"The German economy entered the year 2011 buoyantly. The upswing is expected to continue throughout 2011 with GDP increasing at an average rate of 2.7%. Both internal and external demand will drive the economy. In the course of the forecast horizon, however, economic activity will become less vigorous. There are two key reasons for this slowdown: Firstly, the fiscal stimulus packages are coming to an end and fiscal policy is embarking on a restrictive course. Secondly, but more importantly, the sovereign debt crisis in the euro area is unresolved and taking its toll. The crisis countries are experiencing deep economic recessions, not least because of the fiscal austerity measures they had to adopt. The other member states are also turning to fiscal consolidation. This will dampen economic activity in the euro area, the main market for German export goods. The institutes therefore expect lower export growth and weaker investment demand in Germany for next year. All in all, German GDP growth will amount to 1.7% in 2012. The unemployment rate will decline to 6.6 % in 2012 from 7.1% in 2011. Consumer prices will increase by 2 % and 1.5% in 2011 ands 2012, respectively.

Against this background the ECB should leave its key rates unchanged. This would be in line with its medium-term strategy as second-round effects of recent shocks in oil and food prices are not to be expected.

The current course of the European Council is unlikely to resolve the crisis in the euro area. A comprehensive approach is needed that involves a guarantee of existing government debt and high domestic demand in countries with current account surpluses, in the short run, and, in the medium term, the setting up of a European Monetary Fund, the introduction of euro bonds and a refocusing of the stability and growth pact on current account balances.

The German government should use the technical leeway provided by the good economy to make provisions for cyclical downswings: Given the already structurally underfinanced public budgets, higher than expected tax revenues should definitely not be used for tax cuts. Otherwise, the next cyclical downswing would invariably result in destabilizing fiscal consolidation measures."

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