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FINANCE

Merkel: state must restore faith in markets

Only the state can restore trust to financial markets now, German Chancellor Angela Merkel said on Sunday as she and other European leaders went into an emergency summit in Paris.

Merkel: state must restore faith in markets
Angie shows Sarko how much cash she's brought along. Photo:DPA

“Only action by the state is capable of restoring the necessary trust,” Merkel told the Bild am Sonntag paper following talks on Saturday in France with President Nicolas Sarkozy.

“In this it is important that countries do not act unilaterally but that we coordinate at European and international level and then implement the measures within our national responsibilities,” Merkel said.

Her comments came as she and other leaders from 15-nation eurozone plus Britain began a crisis summit in Paris to hammer out a coordinated rescue package to reassure investors before markets opened on Monday.

According to press reports, Merkel was due to present at the meeting a rescue package that Berlin wanted to implement to shore up its own banks. This included up to €100 billion ($135 billion) in fresh capital in return for equity stakes in the banks – in other words a partial nationalisation, the reports said.

Speaking in Paris before the summit, Merkel gave little away about the German plans, saying only that the aim of the meeting was to “decide on coordinated joint action in the eurozone so that every country in the coming days can put in place measures that stabilise the financial markets.”

The Finance Ministry in Berlin said no details about the German plans would be announced before Monday at the earliest. The details “will definitely not be announced today (Sunday), tomorrow at the earliest,” a ministry spokesman told AFP. The cabinet and other relevant authorities had first to be informed, he said.

Berlin’s reported plan to receive stakes in its banks is similar to the partial nationalisation plan announced in Britain last week. The German plan also includes providing up to €400 billion in guarantees to jumpstart stalled lending between banks.

A week ago Berlin put together a €50-billion rescue of Hypo Real Estate, the country’s fourth biggest bank, but this took the form of guaranteeing badly needed credit lines rather than the state taking a stake in the stricken commercial property lender. Now though a drying up of the amount of liquidity held by German banks – as markets have tumbled in the past week and short-term lending has become even harder to secure – has forced a re-think in Berlin.

According to the Welt am Sonntag newspaper the capital injection alone would total more than €50 billion, while Handelsblatt reported that as much as €100 billion would be made available to stricken banks. It also became clear that the worst hit are not private German banks like Deutsche Bank but the Landesbanks, the regional lending powerhouses that are owned by Germany’s 16 states, the reports said.

Sources in Berlin said that Merkel’s cabinet would discuss the package on Monday with a view to it going through parliament and becoming law by the end of the week – an aim that is far from certain in view of MPs’ misgivings. By shoring up Germany’s banks, Merkel’s government is attempting not only to calm stock markets – Frankfurt’s DAX lost more than a fifth of its value last week – but also to stop panic bank withdrawals by consumers and to prevent the crisis spreading to other sectors of the economy.

“We are not doing it in the interest of the banks but in the interests of people,” Merkel told Bild am Sonntag.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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