Cable Update (GBPUSD)

10/19/2009 7:26:07 AM

Ifo`s Sinn
Strong Euro A Risk To Germany`s Economic Recovery


1 of 1

--But Need Week Dollar To Unwind High US Current Account Deficit
--Germany Should Keep Expansive Fiscal Policies Throughout Next Year
--Government Should Finance Tax Cuts Via Higher Borrowing

BERLIN (MNI) - The marked rise of the euro against the dollar is a
threat to the German economy but a weak dollar is needed to unwind the
high US current account deficit the president of the Ifo institute said
Monday.

Asked by the foreign press here whether the euro could endanger
Germany`s export-led recovery. Hans-Werner Sinn replied "Yes surely.
And this is looming."

However "the strengthening euro and the weak dollar are necessary
to bring down the enormous US current account deficit" the head of the
Munich-based institute argued.

It could take years to overcome such imbalances he predicted: "At
the end the structures will be healthier. But the transition process
will be hard especially for the US and Germany."

Just as the US model of persistent high current account deficits
has been called into question the German approach of continued elevated
surpluses is also in doubt the economist reasoned.

Sinn argued that Germany should not attempt to consolidate public
budgets at the moment. "This would be a recipe to worsen the crisis" he
said.

While the recession is over the underlying crisis was still going
on he contended. The German government needs to continue its fiscal
stimulus measures "in any case throughout the next year."

In that regard it would be advisable for the government coalition
in the making to stick to its plan for marked tax cuts Sinn said. These
must be financed by higher borrowing for now he stressed. Only when the
upswing becomes sustainable should the government turn to expenditure
cuts.