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By Bloomberg

Chancellor Angela Merkel’s council of economic advisers urged her to unleash market forces to spur growth and investment, saying her government’s focus on labor and welfare-state policies is risking German competitiveness.

As the group joined other independent economists and Merkel’s government today in lowering its German growth outlook, the council suggested Merkel is delaying policies that would boost private investment and said balancing the budget alone can’t secure public finances as the population ages.

The five-member council waded into the debate about Germany’s role in lifting the European economy with a critique of Merkel’s first year since her re-election in 2013. While advocating fiscal discipline across the euro area, Merkel’s coalition expanded social-program benefits and set a national minimum wage for the first time in Europe’s biggest economy.

“Reality has caught up with economic policy more quickly than expected,” the economists said in an annual report. “The German economy is still in good shape, offering the opportunity for a new orientation in economic policy, this time on the basis of efficiency rather than redistribution.”

German gross domestic product will probably increase 1.2 percent this year, compared with a forecast of 1.9 percent in March, according to the report. Growth will slow to 1% next year, the forecasters said.

Merkel Response

Merkel questioned the report’s analysis that the minimum wage taking effect on Jan. 1, 2015 is already weighing on the economy. She cited the impact of global crises, a reference to Europe’s standoff with Russia over Ukraine.

“First and foremost, we see geopolitical challenges, some of which are hitting Germany very hard but are also weighing on the mood,” Merkel told reporters at the chancellery. “It’s not entirely trivial to understand how a decision that isn’t even in force yet is putting a damper on the economy.”

Germany’s balanced-budget outlook results from special factors such as low interest rates and the government should use the “good times” now to build up fiscal buffers, the advisers said. Merkel shouldn’t follow advice by bodies such as the International Monetary Fund to use the leeway in Germany’s constitutional debt limits because the fiscal discipline of other euro-area countries isn’t assured, they said.

Merkel has ignored the advisory panel in the past. After the council advised her against a minimum wage and expanded social benefits last year, she went ahead with those policies in her Christian Democratic bloc’s coalition contract with the pro- labor Social Democrats.

“The reform needs are substantial in view of the challenges at hand,” the panel said in its report today.

Germany can’t rest on “a cloud of good feelings,” Michael Kemmer, general manager of the Association of German Banks, said in an e-mailed statement. “Without comprehensive structural reforms, we won’t move forward.”