Schroeder’s tough political year

Germany is under growing pressure to defy a tough election year timetable and to press on with rigorous economic and welfare reforms so as to underpin signs of recovery after three years of stagnation.

Data released Thursday by the nation’s statistics office showed 2003 as essentially a lost year for the German economy with growth contracting for the first time in a decade after a modest growth in exports failed to make up for a weak domestic economy.

But while the data showed gross domestic in 2003 shrinking by 0.1 percent, analysts believe that Europe’s biggest economy gained strength as it entered the new year with quarter-quarter growth in the final three-months of 2003 estimated to have to come in at 0.5 percent on the back of a pickup in the world economy. This compares with a more modest 0.2 percent in the third quarter.

“The outlook for the coming months is positive,” said Ralph Solveen, economist with Germany’s Commerzbank, who predicted that the global economic upturn would help to offset the adverse impact on Germany’s export machine of the strong euro.

*quote1*His views were echoed by German Economy Minister Wolfgang Clement who argued that pent up demand combined with Berlin’s moves to ease the country’s tax burden raised hopes of a turnaround in investment and consumption.        

The GDP data brings to an end a bleak three economic years for Germany with the nation’s economy having stumbled into recession in the first half of 2003 after growing at a feeble 0.2 percent in 2002 and a meagre 0.8 percent in 2001.   

Underscoring the weak state of the German economy, the statistics office said that the nation’s budget deficit as a percentage of GDP jumped to four percent last year as the country’s public sector’s finances were squeezed by dwindling tax revenue and the soaring costs of  unemployment.

At four per cent, Germany’s budget deficit was also well above the three per cent target as set out in the Stability and Growth Pact for euro-member states. 

But despite calls for Chancellor Gerhard Schroeder to launch another round of reforms aimed at further cutting taxes and non-labour costs, a gruelling 2004 political calendar of 14 state, local and European elections is likely to check any enthusiasm in his Social Democrat-led government for more painful reforms in the coming 12 months.

Germany’s national elections don’t take place until 2006, but a string of elections this year, including state elections in Hamburg, Saxony, Thuringia, Saarland, Brandenburg and Saxony.

The 13 June will be something of a super Sunday in Germany with the European elections to be held along with a raft of regional German elections. 

But before that on 23 May, the German parliament will elect a new president for the country.

Schroeder’s public popularity has plunged as the German economy has stalled, unemployment has leapt to a four-year high and as Berlin has slashed public programs in a bid to meet the stability pact’s tough budget targets.

As a consequence, Schroeder will be hoping that further evidence will emerge in the coming months to show Germany’s national economy is on the mend and unemployment is dropping as a way of helping to boost his political standings as the elections move closer into view.

In particular, Social Democratic party strategists will also be hoping that the string of state elections might also Schroeder’s coalition government to redress the current balance in the opposition-controlled upper house of parliament, the Bundesrat.

But although Germany’s national elections are not due to be held until 2006, signs have already started to emerge of the power struggle ahead over who will be the standard-bearer for  conservative Christian Democrat-led opposition to challenge Schroeder in the poll.

As a result this year’s string of elections will also be a major test of the opposition’s performance under the leadership of Christian Democratic Union chief Angela Merkel.

Already the nation’s political leaders have been attempting to raise their profile by staking out a claim in the reform debate.     

Consequently, this year’s batch of elections are likely to be played out against the backdrop of a growing political debate in the country about the launch of further tax cuts in 2005 and the steps needed to streamline and simplify the country’s lumbering taxation system.

Moreover, evidence that the German economy is picking up speed is likely to also help fuel speculation that the European Central Bank will start raising interest rates towards the end of the year.  

German production data released this week showed output expanding by a solid 1.3 percent in November, which beat economists’ forecasts.  German factory orders rose for the third month in November.

 But while German GDP data showed that the nation’s exports have continued to grow despite concerns about euro’s surge, the figures did point to the nation’s consumers still holding back from spending as a result of high unemployment and the uncertainty created by the reform debate. Unemployment in Germany currently stands at 10.4 percent.
 
Exports rose by 1.1 percent in 2003, Thursday’s data showed, down from 3.4 percent in 2002. Private consumption, however, contracted by 0.2 percent last year after slumping by one percent in 2002.

In addition to relaxing Germany’s tough hire and fire laws, Schroeder’s so-called Agenda 2010 reforms also included controversial cuts in welfare benefits along with tax reductions, a shakeout in the federal labour office in part aimed at forcing the unemployed to take on work and measures to tackle the deficit-hit health and pension systems.

But while Schroeder has signalled plans for more reforms this year, he is likely to step back from any ambitious economic changes so as not alienate voters and to avoid a repeat of the damaging public battle with the unions and leftwing members of his Social Democrat Party that accompanied his government’s fight to push his reforms through parliament.

With this in mind, Schroeder has so far announced a crop of rather moderate reforms including an overhaul of Germany’s hard-pressed education system, greater emphasis on research and development and another reworking of the pension system.
 

January 2004

Subject: German News