UPDATE 1-German economic institutes lay into ECB bond-buy plan


(Adds detail, background, quotes)

By Michelle Martin

BERLIN, Oct 11 (Reuters) - Germany's top economic institutestook a swipe on Thursday at an ECB plan to buy weaker euro zonestates' bonds, saying it would threaten the bank's independenceand undermine the currency bloc by stoking inflation.

Concerns about the European Central Bank programme arebroadly based in Germany, where fears about rising prices havebeen rooted in the national psyche since hyperinflation in the1920s, which some argue helped bring the Nazis to power lessthan 10 years later.

Der Spiegel magazine cashed in on this unease, carrying animage of a melting euro coin on its front page accompanied bythe headline: "Warning, inflation! The creeping expropriation ofGermans' wealth."

Jens Weidmann, president of Germany's Bundesbank, was theonly member of the ECB's Governing Council to vote against aprogramme he considers tantamount to financing governments byprinting banknotes.

The institutes said it broke the taboo of financing statesand increased the danger of inflation in the medium term.

"The ECB's decision could shake the main pillar of thecurrency union, namely the goal of price stability," they saidin their twice-yearly analysis.

They said there was also a risk the 17-nation bloc's centralbank would continue buying bonds even if countries did notdeliver on their reform programmes, pushing prices higher andputting the ECB's reputation on the line.

"The problem is that the ECB has taken the pressure offgovernments," said Joachim Scheide, head of forecasting at theKiel-based IfW institute.

ECB President Mario Draghi has insisted the bond purchaseswould be tied directly to countries' compliance with theirfiscal targets.


The institutes said inflation risks were low for theimmediate future, forecasting a 2.0 percent increase in pricesthis year and 2.1 percent next year.

"Nobody would say we are facing galloping inflation but wheninflation is significantly above 2 percent, let's say around 5,6, or 7 percent, then the basic pillar of the currency union isgone," Scheide said.

Both the government and the Bundesbank signalled earlierthis year that they would tolerate higher prices as long aseuro-wide inflation remained under control.

Germany's annual inflation rate slowed to 2 percent inSeptember, data showed on Thursday, just above the ECB's targetfor the euro zone as a whole.

The institutes, whose analysis influences governmentforecasts, also said they expected subdued economic growth.

They halved their growth expectations for next year to 1.0percent and cut their forecast for this year by 0.1 percentagepoints to 0.8 percent.

But those forecasts assumed the euro zone's crisis wouldease and investors regain confidence, and there was "a greatdanger that Germany will fall into a recession," they said.

The German economy weathered the crisis well until earlyyear, but growth slowed to 0.3 percent in the second quarter andmany economists expect a contraction in the third, and possiblyalso the fourth, quarters.

German business sentiment and industrial orders data havetaken a turn for the worse while the private sector is shrinkingand unemployment rising. But a leap in exports has pushedGermany's trade surplus to a five-year high.

The institutes said Germany's budget would be almostbalanced both this year and next on higher tax revenues asconsumers on rising wages spent more freely. That chimes with afinance ministry report published last month.

The number of jobless in Germany was likely to edge up to2.9 million in 2013, the institutes said, while the unemploymentrate would stagnate at 6.8 percent this year and next.

Berlin publishes its own forecasts on Oct 17, which willserve as the basis for its tax estimates and budget planning.

(Reporting by Michelle Martin and Annika Breidthardt; Editingby John Stonestreet)

((MichelleHannah.Martin@thomsonreuters.com)(+49 30 2888 5223))