Euro zone should reform to maintain ECB-driven upswing: German experts

BERLIN (Reuters) - Euro zone states should implement structural reforms to sustain the economic upswing driven by the European Central Bank's expansionary policy which should be curtailed as it threatens financial stability, German economic experts said on Wednesday.

The council of experts that advises the German government on economic policy also said the extent of the central bank's monetary easing was no longer appropriate given the bloc's economic recovery.

"Consequently, the ECB should slow down its bond purchases and end them earlier," the experts wrote in a report that was handed to Chancellor Angela Merkel.

Facing high unemployment, weak growth and the threat of deflation, the ECB has provided extraordinary stimulus in recent years, cutting interest rates into negative territory and buying euro zone government bonds to inject cash into the banking system and make banks lend to the real economy.

The panel of experts said those measures have been a key factor in the euro zone upturn, but they mask structural problems in the bloc and threaten its financial stability.

"The euro area member states should now use the tailwinds of the economic upturn to carry out structural reforms," said council chairman Christoph M. Schmidt. "Even the German government did not sufficiently use the positive economic growth of the past few years for market-oriented reforms."

They said the EU should have increased requirements for banks to raise the leverage ratio to at least 5 percent and impose even higher ratios for systemically important banks.

Leverage ratio is a broad measure of capital to total assets, which aims to ensure banks have enough capital to support their business.

German critics have blamed the ECB's monetary policy for lower profit margins for banks, including Deutsche Bank, Germany's largest lender, which is struggling and has faced concerns about its stability.

ECB President Mario Draghi has denied that the central bank's low interest rate policies were to blame for the German group's problems.

(Reporting by Joseph Nasr; Editing by Michael Nienaber)

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