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EUROPEAN UNION

Merkel defends German stimulus package

Chancellor Angela Merkel on Monday defended Germany's decision to join other European powers in launching a massive economic stimulus but again warned against the danger of mounting debt.

Merkel defends German stimulus package
Photo: DPA

As the global financial storm broke over Europe last year, Germany was initially reluctant to follow Britain, France and other economies in paying huge sums to bail-out banks and businesses feeling the strain.

But in what she called the hardest domestic decision she has had to make as German leader, Merkel last week proposed a new €50-billion ($66-billion) package to haul Europe’s largest economy out of recession.

The measures come on top of a programme agreed in November that the government valued at 30 billion euros. The main thrust of the new package is a huge increase in public spending on roads, railways, hospitals and schools.

Other elements include cuts in tax and social security contributions, as well as incentives for consumers to trade in old vehicles for new “greener” cars to boost Germany’s ailing auto sector.

Nevertheless, as Merkel outlined Monday in an article for the dailies Le Monde, La Stampa, Gazeta Wyborcza, Dagens Nyheter and El Pais, she remains concerned that mounting public debt will undermine eurozone stability.

“In a period of deep global degradation like the one we are going through, the single European currency is a priceless source of stability and security,” Merkel wrote in her pan-European opinion piece. “If we didn’t have the euro, the first lesson we would have taken from this crisis is that we would need to create it as quickly as possible. This is why Germany will continue to deliberately make the rules of the European growth and stability pact its own,” she continued.

“In order to meet its national responsibility, the federal government has decided, in addition to having a plan to repay its debts, to lock long-term debt reduction into the German constitution.”

Under the Maastricht Treaty, eurozone countries are bound to keep public deficits at under 3.0 percent of gross domestic product (GDP).

Since the crisis began, however, many European governments have embarked on massive spending sprees to recapitalise failing banks, bail-out struggling industries and create public sector jobs, breaching that level.

Germany is one of the staunchest advocates of fiscal discipline in the EU but finance minister Peer Steinbrück has acknowledged that his country will break the EU rules in 2010 with a deficit above four percent.

This gloomy outlook was confirmed earlier Monday by the European Commission which predicted a public deficit of 4.2 percent next year as the German economy slams into reverse in 2009.

Brussels said Germany’s economy would shrink by 2.3 percent in 2009 – the worst slump since 1949 – before rebounding gradually to grow 0.7 percent in 2010.

The rapidly weakening economy is also taking its toll on the labour market in Germany. Recent figures showed unemployment on the rise in December for the first time in 33 months to stand at over three million.

Germany’s central bank, the Bundesbank, warned in its monthly report published Monday that firms’ intention to hire more workers was dwindling.

Nevertheless, German companies are in a better shape than in previous downturns to survive the recession, the Bundesbank said, as they have used a more favourable economic environment in recent years to boost their capital reserves.

“This cushion is currently offering them protection against the increasing difficulties resulting from the slowing of the global economy and the continued crisis on the financial markets,” the report 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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