21 September 2005

The Web

Economic lull hangs over German impasse

Matthew Vella

Germany’s economy has been at the centre of the 2005 elections and never before has it had to encounter a more prolonged electoral uncertainty: for the last years there has been little growth, unemployment soaring to 11.5 per cent of the workforce (5 million), and a decline in consumer spending.
Not even the Oktoberfest could have lifted people’s spirits as Germany waits for coalition negotiations to install a new government, headed by either the centre-left’s Gerhard Schröder (SPD) or Angela Merkel for the CDU-CSU, whose party on Sunday got just three seats more than the SPD.
But hopeful that Merkel would have pulled through with enough votes, along with Guido Westerwelle’s liberal FDP, to form a new centre-right government, captains of German industry were reported by the German press to have been disappointed by the result.
And the uncertainty can also hit the Maltese economy, economist Lawrence Zammit says. “It can do so in terms of German investment in Malta and German tourism. But Germany has had a positive experience in the past with a grand coalition government, I think it’s the certainty of having a government that is the issue now, rather than what type of government.”
One of the greatest fears is the fact that urgent reforms of the labour and taxation system in Germany will take longer than expected due to long coalition discussions. “Uncertainty in Germany will always have a negative impact on the European economy,” Zammit says.
Economist Cordina says the formation of a new government has to take into consideration Germany’s current economic performance, especially in its attempts to respect the Stability and Growth Pact and achieving the Lisbon Agenda’s aims.
“If they would form a grand coalition, it has to be seen how credible it is to continue and merge its programmes. What is needed is a government which business believes can continue and sustain economic reforms.”
Between 2001 and 2004, Germany’s GDP increased by an average annual rate of 0.6 per cent against the eurozone’s combined average of 1.3 per cent. There are five million unemployed, two percentage points over the eurozone’s average of 8.7 per cent. The dole figure is as high as 20 per cent in many eastern regions.
Germany is still however the world’s leading exporter, its volume of exports growing by 57 per cent since 1999, faster than anywhere else in Europe, selling EUR733 billion every year.
But Germany cannot continue waiting, former Maltese ambassador to Germany William Spiteri says, even though exports have been booming. “Basically, the German economy needs a more flexible labour market and has to reform its pension and health schemes. Without a new government, no reform is possible.”
Eastern Germany remains a major problem for the country, where billions have been spent on industries which eventually imploded, sending unemployment to ever new heights.
A grand coalition, a possible eventuality, could mean deadlock for policymakers although some business leaders were reported by the German press to favour the settlement.
Klaus-Peter Müller, the president of the German Banking Association, said the election result was a great challenge, since unclear majorities were going to make it difficult to form a stable government. Centre-right proposals for encouraging wage settlement at the company rather than sector level and for relaxing job protection laws were unlikely to be implemented in a grand coalition.
“Right now there’s a frenzy about what they are going to do,” Spiteri says. “Although there are various coalitions by which a government could be formed, the grand coalition between the SPD and the CDU is something nobody wants. Both parties would just be unable to put their programmes into practice. I can’t see industry looking forward to such a situation.”
Speculators have prodded on all types of coalitions, but the situation is currently in a deadlock. Everybody refuses to create an alliance with Oscar Lafontaine’s Linkspartei, ruling out a red-red-green alliance with the SPD and Greens. A new, but unlikely formation, is a ‘jamaica’ coalition – with the CDU and FDP joining forces with the Greens.
But German business leaders are hoping it will be Angela Merkel to breathe in new confidence in Germany’s economy. “Merkel has a detailed programme about future economic reforms, especially about taxation, and many captains of industry have supported the CDU on economic reform,” Spiteri says.
Bloomberg news reported Holger Schmieding, an economist at Bank of America in London, saying foreign investors may reconsider their optimistic outlook for the German economy.
Germany’s overall economic dominance in the EU economy, not only by virtue of being the largest contributor to the EU budget, means its electoral deadlock has created a lot of uncertainty across the EU.
The uncertainty will stall the decision-making process at a time when reforms are really needed. But even with Schröder at the helm, he will still encounter the same problems he had before the election, with the upper house of the Lander parliament controlled by the CDU.
Markets are expected to react negatively although worries were already apparent last week. It will be coalition negotiations which will influence upcoming fluctuations. The uncertainty will weigh on the stock market until negotiations are over, although it is unlikely that corporate investments will flounder.
German businesses are looking forward to have a strengthened economy based on simpler tax law and lower tax rates for companies. Many want to see lower labour costs and greater reforms in the labour market.
German car industry sources were reported as having been pleased that the Greens, and in particular environment ministry Jürgen Trittin, might not make it to the next government, after they lost 0.5 per cent from their vote to become the fifth largest party in the Bundestag.
The parties have 30 days time to elect a new chancellor, who is proposed, after consultations with the parties, by the German President, Horst Köhler, until 18 October. If no new chancellor is elected within 30 days the President will ask the acting chancellor to stay in power until a new chancellor has been elected. “Even if they were to hold a new election,” Spiteri says, “I fear it would deliver the same result, or maybe just change their votes over from the FDP or the Linkspartei over to the main parties.”


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