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ECONOMY

Steinbrück warns against ‘growth bubble’

German Finance Minister Peer Steinbrück has warned that cutting interest rates too low in an effort to counter the global recession could create a what he called dangerous "growth bubble."

Steinbrück warns against 'growth bubble'
Photo: DPA

In a recent interview with the AFP news agency and fresh from his broadside against the British government’s response to the economic crisis, Steinbrück said there was a danger of repeating the dangers of the past.

“On the one hand we need to boost the economy, on the other hand we must make sure that a policy of cheap money does not lead to a new growth bubble founded on credit, as happened after September 11, 2001,” Steinbrück said. “It is therefore important that the focus, at least in Germany, be on sustainable investments in infrastructure and less on consumer spending financed by debt,” he said.

“This is also an argument against hasty tax cuts,” he said. After the 9/11 attacks on the United States and the bursting of the tech bubble, central banks slashed interest rates in an effort to boost growth, allowing consumers to take on huge debts.

This is blamed for contributing to 2008’s credit crisis and the ensuing sharp slowdown worldwide. Central banks have now again reduced borrowing costs, this time even more drastically.

In Germany, where interest rates are set by the European Central Bank as a member of the group of countries using the euro, Chancellor Angela Merkel’s government unveiled a package of measures in November to boost growth. But with Europe’s biggest economy already in recession and facing its worst post-war slowdown, Berlin has been under pressure from all sides to give the economy a much more powerful shot in the arm.

Germany’s ruling coalition – Merkel’s CDU/CSU conservatives and the centre-left Social Democrats, of which Steinbrück is a leading member – are to chew over what else they could do at a meeting on January 5. But in the interview with AFP, Steinmeier again made clear that any new rescue package would not see Germany abandon its cherished budgetary discipline by slashing taxes and ramping up the national debt.

“What we do must be intelligent, be fair to future generations and reap future benefits,” he said. “Making temporary cuts in value added tax (VAT), for example, fulfil none of these criteria.” Merkel and Steinbrück say the first package is worth over €30 billion ($40 billion) but critics accuse them of exaggerating their efforts and say it represents only €12 billion worth of new spending.

Steinbrück said earlier this week that the second package would include steps to help the auto industry and remove hurdles to ensure that infrastructure projects were not held up by red tape. He told the daily Passauer Neue Presse that cutting people’s health insurance contributions would be much more effective in putting cash in consumers’ pockets than reducing taxes.

Germany’s government has angrily rejected calls from economists, politicians from all parties and even from other countries that it is not doing enough to boost its economy, the world’s third biggest. Steinbrück went as far as to dub the British government’s use of heavy borrowing to boost its economy as “breathtaking” and “crass Keynesianism,” referring to 20th century British economist John Maynard Keynes who advocated governments should spend their way out of recession.

He also told AFP that he was confident that once he takes office as US president in January, Barack Obama would press ahead with reforms of international financial system as agreed by Group of Seven major economies.

“I am certain that Barack Obama will seize the initiatives that we have taken at G7 level and press ahead with them with his government,” he said. “Seldom was the chance so good to transform the lessons from such a difficult crisis into concrete political action,” he said.

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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