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TRADE

France attacks hefty German trade surplus

France on Monday accused Germany of trying to boost trade at the expense of Berlin's eurozone partners by squeezing salaries and pushing exports, as Europe seeks to emerge from the global economic crisis.

France attacks hefty German trade surplus
German exports heading out of Hamburg's port. Photo: DPA

French Finance Minister Christine Lagarde called hefty Germany’s trade surpluses unsustainable for its neighbours.

“(Could) those with surpluses do a little something? It takes two to tango,” she told the Financial Times newspaper. “Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs.”

Though Germany recently lost its crown as the world’s leading export nation to China, Europe’s largest economy still has a positive trade balance with most of its immediate neighbours. And eurozone members can no longer devalue their currencies to compensate for Germany’s surplus as they frequently did before the introduction of the euro.

“I’m not sure it is a sustainable model for the long term and for the whole of the group,” she said. “Clearly we need better convergence.”

But Chancellor Angela Merkel’s spokesman on Monday refuted Germany was the problem.

“We are not a country that sets salaries or consumption by decree,” he said. “It is better to think about a growth strategy together rather than obliging some to hold back artificially.”

He underscored the role of Germany’s Mittlestand sector, a vast network

of small- and medium-sized enterprizes, often family owned, that are highly specialised, export oriented and “very innovative and very quick to react.”

“The question is how can others achieve that,” the spokesman said.

Without a federal minimum wage, the German government cannot directly increase disposable income and in the 1990s the country’s trade unions accepted relatively low pay to preserve jobs as aeging German industries restructured operations to keep abreast of others around the world.

Less money to spend, along with high taxes levied to help develop formerly communist eastern Germany and a German tendency towards saving, resulted in an economy that imports much less than it exports.

“It is the relative weakness in imports (and consumption) that has led to the sharp widening of the current account surplus,” Goldman Sachs economist Dirk Schumacher noted, a trend that is not likely to change soon.

A pay deal negotiated by the IG Metall trade union last month for 3.5 million metallurgy workers favoured job security over pay.

Some economists urge the government to cut taxes to encourage consumption, but the government has to deal with a swollen public deficit resulting from stimulus programmes aimed at dragging Germany out of its worst post-war recession.

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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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