Posted on 11/08/2005 3:29:37 PM PST by ex-Texan
BERLIN (Reuters) - Already saddled with one of the weakest growth rates in Europe, Germany seems to be headed for a fiscal tightening that could kill off a tentative recovery and undermine the fragile new government poised to put it in place.
As coalition talks between the country's conservatives and Social Democrats entered their final week, all signs were pointing to a messy compromise on financial policy that would see value-added tax and rates for top-earners increased.
The additional government revenues that result from these measures seem destined to plug holes in Germany's troublesome budget, rather than cutting payroll costs -- as conservative leader Angela Merkel vowed in the recent election campaign.
That course, economists say, risks denting already meagre German consumption, with knock-on effects for the country's weak labour market.
The fiscal consolidation that Germany's parties seem dead-set on achieving through tax hikes rather than spending cuts also looks likely to boost prices and hence the salary demands of the country's big unions.
That could encourage the European Central Bank, which already has its finger on the interest rate trigger, to tighten euro-zone credit sooner rather than later -- another dampener for an economy that is projected to grow by just 0.8 percent this year.
"After all the talk of reform during the election campaign, German economic policy is now headed in the wrong direction," said Thomas Mayer, chief European economist at Deutsche Bank. who is forecasting German growth of 0.9 percent next year.
"If we go further down the road that the coalition negotiations are currently taking we may have to revise down our growth estimates."
TENTATIVE RECOVERY SIGNS
The risks of a fiscal and monetary tightening have emerged just as sentiment towards the German economy is on the rise.
Last month's German Ifo business climate index, perhaps the most closely watched economic indicator in Europe, surged to a five-year high amid signs of a revival in domestic demand.
And much of the recent hard data has also shown improvement. German unemployment resumed its downward trend in October, with the seasonally-adjusted rate dipping to 11.6 percent. Industrial output saw its biggest quarterly jump in nearly two years in the July-September period.
But Germany's stop-start rebound from a 2003 recession is fragile and uncomfortably dependent on foreign demand for German goods. Domestic consumption -- which accounts for nearly two-thirds of the German economy -- has shown only tentative signs of a pickup.
Merkel vowed during her campaign to boost growth and cut unemployment, which jumped to post-war highs earlier this year.
Her failure to secure a parliamentary majority with her liberal allies in a September 18 election doomed some of her more ambitious plans, but the promise of a Merkel-led "grand coaliton" kept alive hopes that Germany would build on the reforms introduced by outgoing Chancellor Gerhard Schroeder.
Now, with coalition talks approaching a Saturday deadline, those hopes appear to be waning along with optimism about a solid German recovery.
The SPD looks intent on blocking Merkel's plans to loosen regulations on hiring and firing. Conservative proposals to make meaningful cuts in government bureaucracy also look doomed.
What the parties do agree on is that 35 billion euros must be found to get the German deficit under European Union limits. Raising taxes to get the cash appears to be an easier route than cutting spending.
"Merkel's original plan to use a VAT hike to cut labour costs was sensible, but what we are seeing now is very different," said Juergen Michels of Citigroup. "Compared to the agenda Merkel was pushing it is quite disappointing."
Any damage to the economy from new taxes could hurt the coalition's chances of achieving their top stated priority -- a decline in unemployment.
Failure to put a dent in the jobless rate, currently at 11.6 percent, could in turn hit support for the new government just as it is trying to win credibility and prove it can last.
"It is distressing how ready the conservatives and SPD are to play with taxes," the Sueddeutsche Zeitung wrote in an editiorial on Tuesday. "And it's alarming how little economic expertise they are showing by doing so."
Come to think of it, Europe is starting to look a bit like the U.S. They have the same problems with border jumpers as we do. More globalization anybody? Thank God that Wall-Mart may implode when the bird flu causes the U.S. to cut off trade with Asia. If I were a betting man, I would have bet heavily against the Euro two months ago. There is still time to play the 4X Market. The Euro may crash through the floor next month. Why? Jihadis are attacking France and Germany is being forced to adopt tighter measures to reign in social spending. Turmoil will be the result.
Just my private personal opinion, people. The froggies are wankers anyway.
"Germany is being forced to adopt tighter measures to reign in social spending. Turmoil will be the result."
Layering more taxes over taxes over taxes as a way to revive your economy. I wonder when the rioting will start - I mean REALLY start?
Reviving a sclerotic economy by boosting domestic consumption--which calls for increased discretionary spending--makes some sense, but achieving this by adding taxes to the cost of goods and increasing taxes on those who can afford to spend now--a truly stunning display of eurwreckonomics.
Funny how the 2 countries that wouldn't stand up for freedom in Iraq are becoming the basket cases of Europe.
The faster this grand coalition falls apart the better, I suppose. The government they have now is not workable. I thought Merkel was going to ride in and save everything. Too bad.
Sorry, but that is VERY wrong!
Obviously, a good number of them fall into that catagory since they represent the "former east German" territories. However, far more were "born and raised" in West Germany.
Normally, I would agree.
However, if this government fails to change the situation in a way that the people will perceive at least some amount of improvement - the CDU/CSU will not get re-elected! They "control" this government and will receive all of the blame when things fail.
"They "control" this government and will receive all of the blame when things fail."
Indeed, the coalition is nothing more than a trap to discredit "reform" without actually reforming. The opposition gets to say, "we tried it their way and it didn't work."
But....the BBC was just telling me how fast the eurozone is expanding and how much growth it will have...after pesky little problems like 20% unemployment and rioting Muslims are taken care of.
http://news.bbc.co.uk/2/hi/business/4445446.stm
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