German advisers want tighter ECB policy, longer Brexit talks

By Paul Carrel

BERLIN (Reuters) - The European Central Bank should wind down its asset purchases quickly and publish a strategy for normalising its expansive monetary policy, a panel of economic advisers to the German government said on Wednesday.

In their annual report, the five-member German Council of Economic Experts who advise the German government on economic policy said the ECB's expansive monetary policy risks jeopardising financial stability and creating market volatility.

Germans have led criticism of the ECB's bond-buying programme, which was introduced three years ago to depress borrowing costs and reignite growth in the euro zone's heavily indebted southern periphery.

"In view of macro economic developments, the ECB should quickly reduce the purchases and end them earlier," the group said in its 437-page report.

Last month, the ECB said it would cut back on its bond purchases, a step towards weaning the euro zone off loose money. But it also extended the bond-buying programme, promised years of stimulus and even left the door open to backtracking.

Market interest rate developments "suggest the ECB should significantly tighten its monetary policy to adapt to macro economic developments", the group said, pressing the central bank to urgently publish a strategy for normalising policy.

The German economy, Europe's largest, was heading for a "boom phase", the group added. They raised their forecasts for German economic growth to 2.0 percent this year and 2.2 percent next year.

With the German economy in robust shape, the advisers urged the next government to tackle the looming challenges of demographic change and digitisation rather than focusing on social welfare.

Chancellor Angela Merkel, who is trying to form a three-way coalition government untested at the national level, welcomed the report. She has said she expects a stable government before Christmas, but senior conservatives close to her say it may take until next year for a new government to be formed.

"It is certainly right that we should aim for a forward-looking economic policy," Merkel said on receiving a copy of the report, calling for a balance between structural reforms to shape up the economy and spending on social welfare.

The advisers identified a disorderly, so-called "hard Brexit" as one risk that would hit Britain hardest when it left the European Union but would also create upheaval in the remaining 27 EU member countries.

They expected a longer time would be needed than the two-year negotiating window foreseen in the "Article 50" legal process that triggered the Brexit talks to complete Britain's exit.

"The Council of Experts believes a one-off extension (of Brexit negotiations) that largely preserves the status quo would be sensible," the group added. The negotiations now are set to end after two years.

"This would also avoid an abrupt hard exit by the United Kingdom that would come with hard-to-judge but high economic costs for everyone involved," they added.

(Additional reporting by Joseph Nasr and Gernot Heller; Editing by Larry King)