Schroeder demands rate cutsas economic worries deepen
26 February 2004
BERLIN – Faced with renewed uncertainty about Germany’s economic outlook, the country’s leaders have been spearheading calls for the European Central Bank (ECB) to deliver another interest rate cut to keep Europe’s biggest economy on a growth path.
German clamours for an ease in rates were also echoed Thursday by European partners France.
French Prime Minister Jean-Pierre Raffarin Thursday joined German Chancellor Gerhard Schroeder and Economics Minister Wolfgang Clement in trying to pressure the ECB into trimming borrowing costs so as to head off the risks posed to Europe’s fragile economic recovery by the strong euro.
Schroeder has twice in the past two days expressed concerns about the strength of the euro against the dollar in comments to the media.
The Chancellor is also expected to raise worries that the weak dollar was hitting Europe’s export machine at talks in the White House this week with US President George W. Bush.
Schroeder said in a Financial Times interview Thursday that the current euro-dollar rate was “not satisfactory”.
His statement follows comments on German radio a day earlier about the problems that the strong euro was causing for Europe’s foreign orders, the driving force behind recent signs of economic recovery.
So far the verbal intervention by EU political leaders has had some impact on the common currency, which has surged by more than 50 percent since slumping to an all-time low of 82 US cents in October 2000.
Amid market speculation regarding a mid-year rate cut and comments from Franco-German leaders, the euro has lost momentum since hitting an all-time high of almost USD 1.30 last week.
The euro stood at under the key USD 1.25 level in early European trading Thursday.
Many analysts believe however that the euro could soon test the crucial USD 1.30 mark before marching on towards USD 1.35 by the end of the year, saying that political calls for rate cuts are likely to prove counterproductive with the fiercely independent ECB.
An added concern for leaders like Schroeder is that a further rise in the euro could also jeopardise job creation, with employers laying off workers to help trim costs in the face of growing global competition for their goods.
With Schroeder facing opposition to his reform programme within his ruling Social Democratic Party (SPD), as well as some 14 state, regional and European elections this year, analysts believe that another round of economic reforms in Germany is now off the agenda until after the national elections set down for 2006.
This was confirmed this week by Franz Munterfering, new SPD party leader, who warned German taxpayers that they should not expect to receive new tax relief this year.
In doing so, Munterfering effectively ruled out new moves, demanded by the country’s Christian Democrat-led opposition, to streamline Germany’s cumbersome tax system and make further tax cuts.
Speaking at an SPD party congress Wednesday Munterfering said further tax cuts would place funding for kindergartens, schools and universities at risk.
Some economists believe that instead of tax reductions, Germany could even face additional taxes. Members of Schroeder’s government are calling for the imposition of punitive fees on companies that do not take on apprentices.
The latest power struggle between Europe’s political establishment and the ECB over interest rates comes against a backdrop of mixed signals concerning the strength of the pickup in Europe, especially in Germany.
Economists took some heart from a rebound in German consumer confidence indicated by a survey published Wednesday by the GfK market research group.
The poll indicated that the nation’s hard-pressed consumers had been pleased by the tax cuts introduced last month and were laying aside worries about high unemployment and additional healthcare costs.
But a surprise February fall in Germany’s Ifo business confidence survey, considered one of the eurozone’s leading forward-looking economic indicators appears to have raised fresh doubts about the country’s growth outlook this year.
The surprise Ifo figures have challenged accepted wisdom at the start of the year that a 2004 German economic upswing was essentially a done deal.
Subject: German news