More German spending justified but it is not a cure all, Bundesbank warns

BERLIN (Reuters) - More budget spending in Germany is justified given extraordinary circumstances but a host of other measures are needed to prop up the economy as growth lags the rest of the EU, Bundesbank President Joachim Nagel said on Monday.

The parties expected to form Germany's next government unveiled plans last week to relax borrowing rules for defence spending and to create a 500 billion euro ($542.30 billion) infrastructure fund, a historic shift from normally austere German governments.

Without directly endorsing the proposal, Nagel said bold steps were warranted, including in defence spending, and the country's constitutionally enshrined 'debt brake' - which limits government borrowing - was in need of reform.

"Extraordinary times require extraordinary measures and I think we in Germany are living in extraordinary times," Nagel said in a speech in Berlin. "Extraordinary times also justify extraordinary fiscal measures."

However, he argued that spending alone will not solve the issues and the government must take measures to increase the labour supply, restructure the energy sector, reduce bureaucracy and cut the tax burden on businesses in Europe's biggest economy.

"Greater scope for borrowing alone will not remedy Germany's weak growth," Nagel said. "The causes are complex and deep-seated. They therefore require a bundle of measures - including many in which financing is not even the main focus."

Potential growth in Germany is now just 0.4% a year or 1 percentage point less than for all other EU nations combined, he said.

Nagel warned that Germany was running out of workers, so there should be more incentives to increase part-time work, especially for women, and to foster labour market-oriented migration.

The corporate tax burden should also be cut since the effective tax rate is 10 percentage points higher than the EU average, and regulation must also be simplified to unburden companies and foster startups, he said.

($1 = 0.9220 euros)

(Reporting by Rachel More; Writing by Balazs Koranyi; Editing by Susan Fenton)