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Merkel hits back at Obama fiscal criticism

Chancellor Angela Merkel vowed Wednesday night to stick to the government‘s tough savings programme and hit back at criticism from Washington that austerity by Europe’s biggest economy could put world growth at risk.

Merkel hits back at Obama fiscal criticism
Photo: DPA

In the wake of US President Barack Obama’s show of concern that Germany’s belt-tightening could put the brakes on the global recovery, a defiant Merkel said her government would not back away from its plan to slash €80 billion from the budget by 2014.

The war of words is likely to continue when world leaders meet this weekend in Canada for the G8 and G20 summits.

“We will implement the efforts that we have agreed on,” Merkel told broadcaster ARD. “I believe that we should not back away.”

It should not be forgotten that Germany had taken on record debt this year in order to stimulate the world economy and domestic consumption, she said.

“Eighty billion euros in a federal budget of €320 billion – if another €10 billion can be saved in the next year because we have good economic growth, then that can only be right for us all.”

That would mean smaller interest payments down the track for Germany’s children and grandchildren, she added.

This week, Obama wrote to European leaders saying he was “concerned about weak private sector demand and continued heavy reliance on exports” – a clear reference to Germany.

Merkel responded in her ARD interview: “On the contrary.”

Germany’s economy was set to grow by 2.1 percent this year – higher than the average for comparable countries, Merkel said, adding that she had made this clear to Obama in a phone conversation Wednesday.

“I believe that this argument has been heard,” she said.

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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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