French, German economists offer plan to counter EU 'stagnation'

PARIS (Reuters) - Warning that Europe risks a "stagnation trap", leading French and German economists proposed reforms and investments to revive growth in the euro zone's two biggest economies, but Berlin swiftly dismissed a key proposal to boost its public investment.

Henrik Enderlein, of Germany's Hertie School of Governance, and Jean Pisani-Ferry, head of the France Strategie government think-tank, offered an implicit trade-off between shaking up the rigid French labor market and regulated professions, and a public investment boost in creaking German infrastructure.

"The biggest danger we see right now is a period of window dressing where lip service is paid to grand projects and reforms, but no real steps are taken," they said, noting both countries face elections in 2017 and there was no time to lose.

"Europe cannot afford to disappoint again, neither economically nor politically," they said.

Both countries' economy ministers backed the proposed reform drive, but Germany's Sigmar Gabriel rejected the call for Berlin to boost public investment by 24 billion euros over three years, more than twice the government's planned figure.

"I don't think that on top of the 10 billion already announced, we could in the short term do twice as much. I really can't see that happening," Gabriel told a news conference with his French counterpart, Emmanuel Macron. "In Germany the real problem is a lack of private investment."

Berlin's planned investment uplift is far less than what leading economists and mayors of German cities say is needed to upgrade public energy, digital and transport networks.

Both ministers said they would look into making national contributions to the European Commission's 300-billion euro investment plan announced on Wednesday, but neither made a specific pledge. Gabriel said German funds could go through state development bank KfW.

The authors proposed setting a floor and a ceiling for the carbon price to repair the European Union's broken emissions trading system and create incentives to invest in the transition to renewable energy and replace old power plants.

FRENCH BACKING

The reform proposals for France broadly mirrored measures Economics Minister Emmanuel Macron has outlined to ease constraints on employment and open sectors to more competition without embracing more radical ideas such as scrapping the 35-hour work week or cutting unemployment benefits.

Macron broadly backed the report but rejected proposals to switch from annual to three-yearly wage negotiations in France, as in Germany, or to link increases in the statutory minimum wage to productivity gains instead of the average wage rise.

As for Germany, while apparently more successful, it faces long-term challenges due to a rapidly ageing population and protracted underinvestment, the authors said. Berlin should do more to promote employment for women and prepare for inflow of migrants to keep its industry and services running.

"In contrast to France, where reforms are urgent and specific, the German reform needs are more fundamental in nature, requiring societal transformation and will likely need considerable time for implementation," they said.

They advocated a points system to attract skilled migrants and an automatic right to a work permit for anyone with a German higher education degree.

Berlin should have a rule obliging it to adopt a consistent balance-sheet approach to public finances with a minimum threshold for investments, they said.

Stressing bipartisan reluctance to embark on more public spending, Gabriel quipped: "In Germany there is the well-known saying that for the Germans, the desire to save on taxes is stronger than the desire to have sex."

(Editing by Jeremy Gaunt and Paul Taylor)