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EUROPEAN UNION

The incredible shrinking chancellor

US President-elect Obama wants to jump-start America's economy, British Prime Minister Brown has slashed taxes and the French President Sarkozy is pushing for a massive EU stimulus package. So why is German Chancellor Merkel sitting on the sidelines?

The incredible shrinking chancellor
Photo: DPA

With the world facing the greatest financial crisis since the Great Depression, one might expect leaders from Tokyo to Timbuktu to be in a state of panic right now. But not Germany’s Angela Merkel.

The proverbial sky might be falling, but the chancellor seems rather unfazed by bank closings, plunging stock markets, terrified consumers and collapsing demand for German exports.

Whereas other politicians from top industrial nations appear to be trying to outdo each other with measures to combat the dramatic economic downturn, commentators at home and abroad are lambasting Merkel for all but disappearing from the global stage.

This week, the newsmagazine Der Spiegel put her on the cover under the title “Angela the Fainthearted: The chancellor’s dangerous dithering over the economic crisis.” The Economist, the British weekly that once praised Merkel’s international leadership and acumen, simply stated in its latest edition: “Miss World goes missing.” If she were starring in her own film it might be titled “The Incredible Shrinking Chancellor” considering all the heat she’s taking at the moment.

Is such criticism warranted? Merkel’s government quickly pushed through a bailout package for beleaguered banks and has passed a modest stimulus package. But she has steadfastly refused to back more measures that could help reignite Europe’s largest economy – which is already in recession and expected to stagnate next year. Tax cuts? Nein. Investing buckets of cash in green technologies? Nein.

“We won’t take part in a constant competition of ever new proposals, in a senseless competition about billions,” she said in a speech to the annual party congress of her Christian Democratic Union on Monday. “I will not stand for it.”

Of course, being reluctant to spend taxpayer money or balloon the budget deficit are both commendable aims. But with the planet facing the prospect of global financial meltdown right now, half of leading during times of crisis is giving the impression you’re proactively doing something even if unfolding events are largely out of your control.

But playing the hero rushing into burning house to save the economy just isn’t Angie’s bag.

This is partly because the chancellor is by nature a cautious person. Trained as a scientist, she eschews political grandstanding and rhetorical hyperbole for quiet contemplation and unhurried decision-making. And Germany has also long been a bastion of fiscal responsibility in Europe, making the country’s politicians loath to splash out like notoriously profligate Italian and Greek governments might.

But at a time when calming jittery financial markets and cowed consumers is crucial to averting a downward economic spiral, Merkel’s reticence makes her appear as if she’s twiddling her thumbs instead of taking the helm.

Of all major European countries, Germany right now is probably in the best position to afford a little more fiscal stimulus either via tax cuts or investment.

But this government isn’t known for showing much concern for sparking consumer demand. Hitting people’s pocketbooks where it hurts the most, Merkel’s coalition raised sales tax by three percentage points to a whopping 19 percent in 2007. If the coalition wanted to get people spending it could now lower the VAT for a limited time, but Peer Steinbrück, Merkel’s finance minister, has dismissed such tax cuts as “ineffective populism” that would simply empty the government’s coffers.

Of course, maybe Merkel isn’t failing as an effective crisis manager and is just operating as cunningly as she always has. Germany depends heavily on exports, so perhaps Merkel and Steinbrück think if the rest of the world is blowing billions to jump-start their economies then that will once again spark demand for quality German products. Why pay for a recovery when other leaders in Washington, London and Paris will do it for you?

But if Merkel finds she can’t export the country out of the recession she might truly shrink from the Chancellery after the next general election in the autumn of 2009.

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.

READ ALSO:

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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