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ECONOMY

Germany’s triple-A rating under threat

The credit ratings agency Standard & Poor’s warned Tuesday that Germany’s top rating could be downgraded if Chancellor Angela Merkel’s government decides to pour more money into the European bailout fund.

Germany’s triple-A rating under threat
Photo: DPA

European leaders are currently debating whether to increase the European Financial Stability Facility (EFSF) to over a trillion euros, so that it would be in a position to bail out major eurozone economies like Spain or Italy in an ermergency. Other suggestions include using the European Central Bank (ECB) to back the EFSF or integrating European financial policy more closely.

Closer cooperation would certainly help highly indebted countries like Greece, but it could also raise credit costs in richer countries like Germany and France.

The German parliament is due to vote on putting more cash into the EFSF on Thursday.

In July,Merkel agreed with other eurozone heads of state to increase the fund from €250 billion to €440 billion, while state guarantees are to rise from €440 billion to €780 billion. If the vote is passed, Germany’s contribution will increase from €123 billion to €211 billion.

The EFSF is also to be given the power to buy up government bonds from states in crisis, currently a function of the ECB.

David Beers, expert in assessing country ratings at Standard & Poor’s, told the Reuters news agency, “We’re getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road.”

“There is some recognition in the eurozone that there is no cheap, risk-free leveraging options for the EFSF any more,” Beers added.

Frank Engels, an economist at Barclays Capital, said that even if lawmakers pass the bill “by a very healthy majority,” growing disunity between Merkel’s Christian Democrats and her coalition partners the Free Democratic Party signalled trouble ahead.

“German politics is likely to become even more volatile than before in the wake of the growing divergence between the FDP and the Conservatives on matters related to EMU (monetary union),” he said.

In a test vote on Tuesday, 11 Christian Democrat MPs voted against the bill, with two abstentions. Merkel’s coalition government has a 40-seat majority in the Bundestag over the opposition.

Speaking at the Federation of German Industry (BDI) in Berlin on Tuesday, Greek Prime Minister Giorgos Papandreou promised that Athens would meet all of its obligations.

“Yes, we can,” Papandreou said, echoing the famous rallying cry of US presidential candidate Barack Obama in 2008. “We are not a poor country, we were a poorly managed country.” The prime minister called on Europe to use the current crisis to become a “stronger.”

Germany and the European Commission have meanwhile increased the pressure on Greece to cut costs again.

DAPD/DPA/AFP/The Local/bk

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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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