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 institutes took a swipe on Thursday at an ECB plan to buy weaker euro zone states' bonds, saying it would threaten the bank's independence and undermine the currency bloc by stoking inflation.

Concerns about the European Central Bank programme are broadly based in Germany, where fears about rising prices have been rooted in the national psyche since hyperinflation in the 1920s, which some argue helped bring the Nazis to power less than 10 years later.

Der Spiegel magazine cashed in on this unease, carrying an image of a melting euro coin on its front page accompanied by the headline: "Warning, inflation! The creeping expropriation of Germans' wealth."

Jens Weidmann, president of Germany's Bundesbank, was the only member of the ECB's Governing Council to vote against a programme he considers tantamount to financing governments by printing banknotes.

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

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

They said there was also a risk the 17-nation bloc's central bank would continue buying bonds even if countries did not deliver on their reform programmes, pushing prices higher and putting the ECB's reputation on the line.

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

ECB President Mario Draghi has insisted the bond purchases would be tied directly to countries' compliance with their fiscal targets.


The institutes said inflation risks were low for the immediate future, forecasting a 2.0 percent increase in prices this year and 2.1 percent next year.

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

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

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

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

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

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

The German economy weathered the crisis well until early year, but growth slowed to 0.3 percent in the second quarter and many economists expect a contraction in the third, and possibly also the fourth, quarters.

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

The institutes said Germany's budget would be almost balanced both this year and next on higher tax revenues as consumers on rising wages spent more freely. That chimes with a finance ministry report published last month.

The number of jobless in Germany was likely to edge up to 2.9 million in 2013, the institutes said, while the unemployment rate would stagnate at 6.8 percent this year and next.

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

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

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