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German crisis of confidence 'getting worse'
A top Bundesbank governor warned yesterday that Germany was sliding deeper into fiscal crisis and risked a profound failure of nerve.Jurgen Stark, the bank's deputy chief, said it was far from clear that the new Left-Right government of Angela Merkel was up to the task of rescuing Germany from slump and self-despair. "There is no confidence in the future, there is no confidence in the sustainability of public finances, and no confidence in the ability of policymakers to solve the problems," he said. "It remains to be seen whether the grand coalition under Merkel can solve the confidence and growth crisis." Under pressure from the Left, Chancellor Merkel has had to abandon plans for an overhaul of the tax system. Instead, the coalition is raising VAT from 16pc to 19pc. The economy could face a "double whammy" as the European Central Bank moves to raise interest rates next week for the first time in two and a half years. The IFO business climate reported yesterday showed a sudden slide for October. After stewing in its worst slump since the Great Depression, Germany has shown signs of life over recent months - growing 0.6pc in the third quarter. But there have been two false dawns already, and the latest recovery is driven by exports. While Germany has overtaken the US to become the world's top exporter, capturing 10pc of the global share, it is a double-edged feat. Ultra-competitiveness has come at the expense of German workers. The corporate wage squeeze has driven down unit labour costs by 4pc over the last year alone. Shell-shocked Germans are still staying away from the shops. Unemployment has averaged 4.9m this year. Adding to the gloom, Berlin failed to sell a â¬7.96billion block of 10-year bonds this week, the first auction flop since 2000. It follows a warning by Standard & Poor's that Germany might lose its coveted AAA credit agency unless it seizes the nettle of reform. S&P doubted whether the package agreed after weeks of arduous talks was enough to stop the downward drift. "The coming years offer the last chance to mitigate the long-term fiscal implications of Germany's ageing population in a manner that is not socially disruptive,'' it said. It said Berlin must stick to a "credible medium-term fiscal plan that will stabilise and eventually reverse the current rise in government debt". The budget deficit could reach 4pc of GDP this year, breaching the constitution, while the national debt is nearing the danger level of 70pc of GDP. Undaunted, foreign funds have been snapping up German assets at bargain prices this year, while Frankfurt's Dax stock index is up strongly. Posted by: lotp 2005-11-25 |
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