Germany slides towards a recession

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http://www.sunday-times.co.uk/news/pages/sti/2001/05/27/stibusnws02012.html

http://www.sunday-times.co.uk/news/pages/sti/2001/05/27/stibusnws02012.html

May 27 2001 BUSINESS NEWS

Growth and confidence are falling. Report by Michael Woodhead in Frankfurt

Germany slides into recession

As Hans Eichel, the German finance minister, last week sat at the pristine cabinet table in the sparkling new Berlin chancellery, he had in his hand the latest depressing figures on the state of the German economy.

They showed that Germany is sliding towards a recession. Already bottom of the European growth league along with Greece and Portugal, Eichel's portfolio revealed that on current trends Germany will slip into the shadows.

Worst of all was the blue-bound Bundesbank report handed to him earlier that week by the bank's president, Ernst Welteke. It showed that growth in the first quarter of this year reached a paltry 1.5%.

Welteke had also brought with him the latest barometer of business sentiment in Germany. Companies' confidence fell by more than 1% last month - to 92.5%, the worst figures for two years, according to IFO, the Munich-based think tank,

When the news broke on the markets, the euro dropped to 0.8652 against the dollar within a few hours. "No one has a good word to say about it," said Rainer Sartorius, an analyst with HSBC in Frankfurt.

That same evening one of the government's leading economic advisers, Jürgen Donges, confessed on television that growth might now fail to reach even 2%.

In a statement Eichel's finance ministry admitted: "A noticeable weakening in both production and exports has emerged in the course of the current quarter."

With petrol prices up 17%, rents rising and heating costs up 17%, German consumers are reluctant to spend their money. "We don't believe domestic demand will offset the decline," said the Bundesbank report. Even when fuel prices are stripped out, factory-gate prices have risen 4.5% this year.

"Germany faces a mild recession," admits Holger Schmieding of Deutsche Bank. Unemployment is not going down and inflation is rising irresistibly. It is now running at 3.5% - a seven year high.. The national debt - still above what is allowed by the Maastricht treaty - and a looming black hole in state revenues threaten to tear Eichel's budget plans asunder.

Germany is Europe's biggest economy and Britain's largest export market within the EU, and the danger is that the paralysis that has gripped Chancellor Schröder and his government will drag the rest of the Continent down with it. Fundamental solutions were not on the agenda tabled by Schröder at his weekly cabinet meeting.

"They're looking to the American upswing but they're living in Utopia if they think this is going to help," said Willi Liebfritz of the IFO in Munich.

The German leader is focused on promoting his party as the one that is delivering income-tax reductions, pension reform and more child benefits - palliatives for the people ahead of next year's election campaign.

"We can say with certainty that we need no longer have hopes of structural reform from this government, either now or when and if Schröder is re-elected. He had banked on the economic upswing getting him out of trouble. But that's not going to happen now. He has run out of height and ideas to avoid a bad landing," said Jürgen Pfister, chief economist of Commerzbank in Frankfurt.

German businesses still pay the highest social taxes in the world. For example, for a worker earning £2,000 a month an employer pays a further £2,000 in taxes and levies into the government's social budget.

Job vacancies in east Germany are at their lowest since reunification. Unemployment remains at 3.8m nationwide with the rate in the east still above 20% in some areas.

"We're getting a big increase in German firms wanting to set up subsidiaries in London. What's the point in expanding at home when you can do it cheaper in the UK?" asks Hans Peter Ickemeyer, European director for London First, the relocation agency.

Since January the economic news has been getting worse by the month. The euphoria of last autumn when Schröder basked in predictions of 3% growth has gone. Yet the misplaced belief that it was going to be jam tomorrow for Germans was held even in the highest echelons of financial institutions.

"Pessimism is misplaced. I'll tell you officially we're saying 3% but I've got guys here who tell me it's going to be nearer 4%," confided Dr Klaus Friedrich, chief economist at Dresdner Bank, in November.

Then it was talk of Germany being well placed to weather the fall-out from America, now it is talk of the expected American recovery coming to the rescue. These views are dismissed by Martin Hüfner, chairman of the economics committee of the Association of German Banks. "Europe is the rock on which the world economy could well flounder," he says.

In March Schröder shrugged off the critics. "There are no grounds for pessimism," he claimed. But within days his finance minister admitted their figures were off target.

"Growth will be lower than we expected," he said. The new estimate for this year was 2.5%. From that point the German government privately backed the intense pressure on the European Central Bank in Frankfurt for a rate cut to shove the world economy away from the doldrums. The bank's chairman, Wim Duisenberg, obliged.

This is the second time he has bowed to political pressure since Schröder came to power. When he was forced into a cut by former finance minister Oskar Lafontaine two years ago, Duisenberg made it clear he expected Germany to reform its economy by liberalising social rights and employment laws. Schröder has done the opposite. Yet a rate cut is hardly likely to have an immediate effect in Germany, and certainly not in the next six months. Such hopes defy economic common sense.

"It puzzles me to see bank rates re-emerging as a central lever for short-term economic policy among politicians when this practice has been discredited in the past," says Norbert Walter, head economist of Deutsche Bank.

-- (M@rket.trends), May 27, 2001

Answers

The Brownshirts are marching.

-- (Uberdog@Munchen.Deutschland), May 27, 2001.

No, the "Brownshirts" are, if you'll pardon the pun, receding...

-- what's (in@a.pun), May 27, 2001.

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