German economy motors ahead

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Germany's economy will power ahead in 2011 and 2012, the government said Wednesday, providing a boost to the crisis-stricken eurozone and Chancellor Angela Merkel ahead of a make-or-break political year.

"The upswing has become extra strong and we want to make it extra long," said a triumphant Rainer Bruederle, economy minister.

"It's quite simple, we are the motor for the entire European economy."

Europe's top economy will grow by 2.3 percent this year, Berlin said in its latest official forecasts, a sharp hike from its previous estimate of 1.8 percent in October.

And growth will continue to be solid in 2012, at 1.8 percent, Bruederle said.

As the economy steams ahead, Germany's unemployment rate is slated to fall further in what has been dubbed a "jobs miracle." Berlin expects an average jobless rate in 2011 of seven percent, after 7.7 percent in 2010.

The positive growth figures are also set to help Germany return to below the European Union's three-percent limit on public deficits. The 2011 deficit should be 2.5 percent of gross domestic product, the minister forecast.

"That's two years earlier than the EU asked for," he said. Germany's deficit in 2010 was still above the ceiling, at 3.5 percent.

As the world's second largest exporter after China, Germany's recovery was initially driven mainly by increased demand for its goods abroad as the global financial turmoil eased.

But recently, the upswing has been increasingly sustained by domestic demand as low unemployment and a buoyant economic mood have encouraged consumers to prise open their wallets and firms to make investments.

"The upturn now has two stable legs -- exports and domestic demand," Bruederle said.

Lower unemployment and a stronger economy have also boosted Merkel's political fortunes recently, surveys show, after her popularity dipped during last year's bailout of Greece on voter anger that Germany was having to pay for the weaker, less disciplined states in the eurozone.

Merkel's coalition government is girding itself for seven regional elections this year that could decide its future, with the first in Hamburg in four weeks' time.

A poll last Wednesday showed Merkel's conservatives at 35 percent, the opposition Social Democrats (SPD) at 25 percent and the high-flying ecologist Greens at 21 percent.

Other recent polls have put Merkel's party at similar levels. However, the chancellor's pro-business coalition partners, led by Foreign Minister Guido Westerwelle, continued to languish, polling just three percent.

Holger Schmieding, an analyst at Berenberg bank, said that Merkel still faced an uphill struggle this year despite the success of the economy.

"Germany is enjoying a golden decade," he said.

"While 2011 could be a good year for the German economy, it could still be very noisy. Chancellor Merkel is facing a tough time. Amid the usual mid-term blues, the parties backing her government may lose a string of regional elections," he added.

Moreover, the political situation in Germany could hamper efforts to devise a long-term solution to the European debt crisis, the analyst warned.

Merkel was slammed for reacting too slowly to the Greek debt crisis in May and stood accused of driving up the eventual cost of the bailout package eventually agreed.

"Domestic political concerns could make the German reaction to any escalating euro debt crisis quite clumsy again in 2011, as had been the case in 2010," Schmieding said.

© 2011 AFP

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