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EUROPE

Merkel’s euro moment

After facing months of criticism over her lack of leadership during Europe’s debt crisis, Chancellor Merkel has decided defending the eurozone is in Germany’s best interest. The Local’s Marc Young analyses the implications.

Merkel's euro moment
Photo: DPA

Has Angela Merkel saved the euro?

That’s certainly how the German chancellor was presenting it after an emergency EU summit on Thursday forged yet another bailout package for heavily indebted Greece.

With the eurozone’s sovereign debt crisis festering for months, Merkel has faced a barrage of criticism both at home and abroad for failing to lead Europe out of its worst economic crisis since the single currency was introduced 12 years ago. But many German commentators were cautiously optimistic on Friday that she had perhaps finally decided to grasp the nettle.

The latest rescue deal greatly stretches the timeframe for Greece to repay its debt while lowering the interest rate Athens will have to pay. Crucially for Merkel, it also includes a €50-billion contribution from private creditors – something Berlin had long demanded.

And although it also inches the eurozone closer to the transfer union the Germans had long hoped to avoid, Merkel had clearly realized that sitting on the sidelines was simply no longer an option.

Throughout the crisis, the financial markets have in succession battered Greece, Ireland and Portugal – all troubled but relatively small eurozone economies. But in recent weeks, speculators began to circle Italy, which threatened to bring down the entire 17-nation currency union.

Merkel knows that, as an exporting nation few countries have benefited from the euro as much as Germany. But she has hesitated until now to simply pick up the tab for more profligate European countries. But such dithering did neither Greece nor Merkel any good.

Just days ago the chancellor was playing down Thursday’s crisis summit, warning against expecting a breakthrough. At the same time a poll showed her approval rating with German voters hitting its lowest point in five years.

The impact of Merkel’s disengagement throughout the euro crisis has been remarkable: No other major economy is doing as well as Germany right now, but her centre-right coalition is also extremely unpopular. It has not profited at all from surging growth and falling unemployment.

Instead, her failure to make tough decisions has seen her pilloried for supposedly putting domestic political concerns before key foreign policy issues. Her former mentor Chancellor Helmut Kohl reportedly even claimed Merkel was “ruining” Europe.

But now it seems clear to everyone inside the Chancellery that Merkel’s political fate and the euro have become inextricably intertwined.

In saving the euro, Merkel saves herself.

After months of criticism, she appears to have got the message – and passed it along.

Phillip Rösler, Merkel’s vice chancellor and economy minister, is reportedly cobbling together an incentive plan to encourage German companies to help the battered Greek economy. Is decisive action Berlin’s new modus operandi?

Only time will tell, of course. This government has repeatedly failed to meet the rather low expectations set for it. But for the eurozone the change couldn’t have come a moment too soon.

Marc Young

[email protected]

twitter.com/marcyoung

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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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