This sombre look at Germany from inside 'gels' with what readers will
have read here. For what it's worth I'm with Peter Steinbrück rather
than Angela Merkel.
Then the Wall Street Journal looks at Europe in general and warns of
what's almost inevitable. Getting out of the recession is going to
be more painful than falling into it. cs
have read here. For what it's worth I'm with Peter Steinbrück rather
than Angela Merkel.
Then the Wall Street Journal looks at Europe in general and warns of
what's almost inevitable. Getting out of the recession is going to
be more painful than falling into it. cs
FINANCIAL TIMES 15.5.09
Berlin faces record budget deficit
By Bertrand Benoit in Berlin
this year as the economic crisis sends tax revenues plummeting, Peer
Steinbrück, finance minister, said yesterday.
Mr Steinbrück admitted the federal deficit would exceed ?50bn ($68bn,
£45bn) in 2009 and rise to ?90bn next year, more than twice the
previous record of ?40bn set in 1996 as Germany was absorbing the
huge cost of its unification. In contrast, the federal deficit last
year was only ?11.9bn.
The figures, based on official tax revenue forecasts released
yesterday, make it clear Germany will breach the European Union's
fiscal rules by a wide margin this year and next. Berlin expects the
economy to shrink by 6 per cent this year in the sharpest contraction
since the Great Depression of the 1930s.
The likely scale of the budget deficit will play a central role in
campaigning ahead of Germany's September general election and could
weaken Angela Merkel, chancellor, after she pledged to cut income tax
if her Christian Democratic Union won.
Her promise was an attempt to end a spiralling debate within her
political camp between advocates of tax cuts and those backing fiscal
consolidation, although she did not say when exactly she would
deliver on it if handed a second four-year term.
The Social Democratic party, junior partner in Ms Merkel's "grand
coalition" and her main election rival, seized on the new figures,
saying they had exposed Ms Merkel's tax-cut pledge as "pure
electioneering".
"To promise tax cuts now is to deceive voters, purely and simply," Mr
Steinbrück, a Social Democrat, said, adding that the government's
main fiscal priority until Germans returned to the polls again in
2013 would be to mend public finances.
Karl Heinz Däke, president of the German Taxpayers' Association, a
pressure group, told the Financial Times: "It is clear that taxpayers
will be hugely affected by this economic crisis . . . We welcome the
debate about tax cuts but we know today's promises are unlikely to
live beyond September 27."
Mr Steinbrück's comments came as his ministry updated its twice-
yearly tax revenue forecast yesterday, showing expected tax proceeds
of ?527bn for all levels of government this year, down ?45bn from the
November estimate and ?13.7bn - or 5.7 per cent - below last year's
level. The forecasts derive directly from the government's economic
growth forecast, which was published late last month.
Opponents of tax cuts within Ms Merkel's CDU, who include public-
finance experts in parliament and several state premiers, were
emboldened by the publication yesterday.
Topping Mr Steinbrück's already sombre predictions, the conservative
MPs said this year's federal deficit would not just reach ?50bn but
would grow to ?84bn when an off-budget "redemption fund" created by
Berlin in January to finance a two-year ?80bn fiscal stimulus was
included.
Bernd Raffelhüschen, economist at Freiburg University, said the MPs'
deficit estimate suggested that public debt would reach ?22,709 per
head in 2010, almost three times its level of 1990 and up from ?180
in 1950.
=================================
WALL ST JOURNAL Blogs 15.5.09
Europe's Social Benefits Are at Risk
By MARCUS WALKER
BERLIN -- Europe, deep in an economic trough, has begun a debate
about how to repair its battered government finances after the
crisis, sparking warnings that it will need to reduce spending on
rising social benefits.
Reinforcing concerns about the depth of the trough, Spain -- the
first of the four biggest economies using the euro to post its first-
quarter growth number -- revealed Thursday that its economy suffered
its worst contraction in nearly 40 years.
The European Union's top economy official, Joaquin Almunia, warned
Thursday that fast-rising public debts will force governments to cut
back their spending, including those on social benefits that many
countries now are expanding to protect voters from the downturn. The
crisis could leave Europe with a combination of "subdued growth
potential, high unemployment and public finances under severe
strain," forcing countries to rethink their pension systems and
welfare benefits, Mr. Almunia said in a speech. [There's no escaping
it - things are going to be more depressing in the recovery period
than during the crash -cs ]
In the latest example of Europe's deteriorating public finances,
Germany said it expects a ?316 billion ($429 billion) tax shortfall
in the next four years because of the recession. That could undermine
the credibility of some politicians' calls for tax cuts ahead of
Germany's election in September and force the next German government
to make unpopular spending cuts.
Like elsewhere in Europe, such cuts could affect the very benefits,
such as support for the jobless, that are helping many ordinary
Europeans to cope with the region's worst recession in decades. High
social spending has reduced the pressure on European governments to
adopt bigger stimulus measures like the U.S.'s, but policy makers
acknowledge it is also a long-term burden.
In Spain, meanwhile, gross domestic product tumbled 1.8% in the first
quarter from the previous quarter -- the third consecutive quarter of
decline. On a yearly basis, GDP fell 2.9%, the steepest drop since
official records began in 1970. Spain's economy has gone into free
fall after a decade-long, credit-fueled building bubble imploded last
year. Its unemployment rate has more than doubled in a year to 17.4%,
by far the highest in the 27-nation EU.
The financial and economic crisis is leading to ballooning budget
deficits across Europe. A combination of costly banking bailouts,
economic-stimulus measures, and the automatic effect of rising social
benefits and falling tax revenues in a recession are set to push up
public debt massively in all major European countries.
Reversing the trend and complying with EU rules that limit debt and
deficits will require politicians to raise taxes, angering businesses
and employees who already complain of suffocatingly high tax burdens,
or to cut spending, challenging powerful interest groups, including
retirees and public-sector workers.
"This is a long-term question that will be a permanent issue at each
election in Europe," said Eric Chaney, chief economist at French
insurer AXA. "Whether to pursue fiscal rigor, and how to do it, is
probably going to be the main difference between political parties in
Europe." The IMF warned Tuesday that European countries need to make
a "clear and credible commitment to long-run fiscal discipline," or
else risk-averse financial markets will punish them by demanding
higher interest rates, making it harder for countries to borrow and
escape the recession.
Rising taxes or spending cuts could slow Europe's economic growth for
years, making the region less attractive for investors and adding to
some countries' declining competitiveness. Europe already is
suffering from deeper drops in investment by foreign companies than
other parts of the world economy.
Foreign direct investment (FDI) in the EU by companies from outside
the bloc fell 57% to ?173 billion in 2008 from a year earlier, while
FDI flows within the EU fell 42%, according to EU figures released
Thursday. Those declines were heavier than the fall in global FDI,
which declined 21% to $1.4 trillion in 2008, according to U.N. figures.
In some countries, the need to cut public deficits is boosting the
political right, which is more critical than the European left of
high government spending, including on benefits. But the deficits
also are puncturing conservatives' hopes of cutting taxes, while some
left-leaning politicians are also championing budget discipline.
In the U.K., Conservative opposition leader David Cameron, clear
favorite to win British elections due by next year, has warned that
the next government will have to hold down public-sector pay and curb
benefits and tax credits.
French President Nicolas Sarkozy's efforts at overhaul are continuing
despite the recession, but they probably won't be enough to reach his
goal of a balanced budget, said Dominique Barbet, economist at BNP
Paribas in Paris. "We probably need more reforms, but at the same
time the resistance is growing."
In Germany, Chancellor Angela Merkel's conservative Christian
Democrats are in disarray over whether to campaign for tax cuts in
fall elections.
........................................................................
...........
-Thomas Catan in Madrid contributed to this article.
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