The logo of the Deutscher Sparkassen- und Giroverband DSGV (German Savings Banks Association) is pictured at their headquarters in Berlin, Germany, February 15, 2019. REUTERS/Fabrizio Bensch

By Christian Kraemer

WASHINGTON (Reuters) -Germany's Mittelstand could invest much more but is hesitating because reforms to strengthen the country as a business location are still lacking, the president of the German Savings Banks Association (DSGV) told Reuters.

German Chancellor Friedrich Merz took office in May promising to revive stagnant growth following two years of economic contraction.

While it was clear that Merz's promised rise in public spending would take time to benefit the economy, there is a growing sense that the promised reforms are slower and less far-reaching than initially expected.

"The Mittelstand has solid fundamentals, a reasonable equity base and therefore the capacity to invest," DSGV President Ulrich Reuter said in an interview on the sidelines of the International Monetary Fund meetings in Washington.

Germany's small and medium enterprises, known collectively as Mittelstand, are the backbone of Europe's biggest economy.

Reuter added that there was no lack of liquidity either.

"In absolute terms, in the first six months the savings banks issued as many new loans as are available from the special fund for modernizing infrastructure, on a pro rata basis, for the entire year," Reuter said, comparing it to the 500 billion euro ($581.90 billion) German government fund.

Although there was a 16% increase in loans year-on-year, the money was used mainly to replace previous investment, he said.

"Companies are doing only what is absolutely necessary," Reuter said. "What's missing are future-oriented investments."

MITTELSTAND WAITING FOR THE PROMISED REFORMS

The "autumn of reforms" promised by Merz has not arrived yet, according to the DSGV president.

"The approaches are good, but more needs to come," Reuter said. "Take the pension system as an example: if the pension level is to be maintained and contributions are not to rise, people have to work more and longer. That's pure mathematics."

Germany's cabinet agreed on a draft law on Wednesday to encourage work after retirement by allowing those who do so to earn up to 2,000 euros a month tax-free, but raising the retirement age is not part of the government coalition agreement.

More private investment is needed for a sustainable economic recovery, according to Reuter.

"To that end, the brake on the Mittelstand must be released," he said.

($1 = 0.8593 euros)

(Reporting by Christian Kraemer; Writing by Maria Martinez; Editing by Jamie Freed)