As you might guess I rejoice in how well the FDP has done in the convoluted political soup of the German electoral system. It will benefit the world that someone of such a radical frame of mind has at last come to leaven the Lumpenpolitik of the CDU/CSU. The latter has been stuck in a time-warp for decades and still clings to the corporatist model which has been a continuing thread in Germany from Bismarck, through the Kaiser to one regrettable Adolf Hitler. It has no flexibility in a crisis.
This inflexibility shows through in some of Merkel’s rigid responses to the result. She will have to smarten her act up - and sharpish!
Christina
TELEGRAPH
29.9.09
1. Merkel warns on spending cuts, fearing Depression era
The era of cosy consensus in German politics is over. The election victor is arch-Thatcherite Guido Westerwelle, who led his pro-business Free Democrats to their best result ever with acerbic attacks on the welfare state and trade unions – which he called a "plague on our country".
By Ambrose Evans-Pritchard
The era of cosy consensus in German politics is over. The election victor is arch-Thatcherite Guido Westerwelle, who led his pro-business Free Democrats to their best result ever with acerbic attacks on the welfare state and trade unions – which he called a "plague on our country".
Chancellor Angela Merkel's Christian Democrats and Bavarian allies survived the vote with a clipped mandate. She will have to give ground to Mr Westerwelle in the Centre-Right coalition as he presses for his great shrinkage of Germany's Leviathan state – tax cuts, spending cuts, subsidy cuts, labour reform, and emasculation of the state Landesbanken – whatever her own preference for playing the consensual role of national "Mutti" (Mum). [Sweet music ! -cs]
"German policies will likely shift towards a pro-growth agenda: this is a significant positive for German equities," said Holger Schmieding from Bank of America.
The shares of energy giants E.ON and RWE jumped 4pc on the expected reprieve for Germany's nuclear power plants. Solar companies wilted, punished with their Social Democrat patrons.
Ms Merkel urged caution yesterday at her press conference, evoking the memories of the Great Depression. "It is not wise to talk about austerity measures so long as we are in this trough. We must do everything to avoid repeating what the Americans did at the end of the 30s – namely to wreck the small upturn then visible by retrenching too soon."
This is a reference to US policy in 1936 and 1937 when Washington tightened policy too soon, believing the coast was clear. It tipped the economy back into depression.
Ms Merkel may have been complacent at the onset of the crisis last year but now seems acutely aware that Germany's industrial export machine remains vulnerable to the vagaries of world trade. The economy rebounded slightly in the second quarter with 0.3pc growth but GDP has shrunk by 6.7pc and will not regain its former level before 2013, according to the Bundesbank.
The slow damage is what will play havoc with German public finances in the end. The International Monetary Fund says Germany's public debt will rise to 91.4pc of GDP by 2014 (Britain will be at 87.8pc), a serious concern for a country with a declining workforce.
Hans Heinrich Driftmann, head of Germany's Chamber of Commerce, said the last coalition had failed to take advantage of the boom years to push through root-and-branch reform. [We accused Brown of ‘failing to repair the roof while the su shone’. -pcs] "We need iron discipline: all government spending must come under review. The state isn't a cash cow [Goldesel]," he said.
Berlin's revenues will fall short by almost €350bn (£322bn) over four years. The unemployment fund is already €20bn in deficit and facing strain over the next two years. The Labour Agency expects the jobless rate will rise from 2.8m to as high as 4.5m by 2011.
The risk for Germany is that the economy tips into a double-dip recession as emergency stimulus subsides. Its cash-for-clunkers scheme expired earlier this month after a rush of sales over the summer. The Centre for Automotive Research says sales will fall by a million next year in "the largest downturn ever suffered by the German car industry".
The state's "Kurzarbeit" scheme subsidises firms to keep staff on their books at full pay for part-time work but this is costly for companies and cannot continue much longer.
"The second wave has yet to hit us," said Laurenz Meyer, economics spokesman for the Christian Democrats. The economics ministry is drawing up plans to alleviate a credit crunch over the winter as small firms exhaust their credit lines. Yet the European Central Bank has stuck to a tight policy course, allowing credit to firms and household in the eurozone to contract over the last six months.
Hans Redeker, currency chief at BNP Paribas, said the ECB risks a serious error. "They think the financial system will recover as if this were a normal cycle but it's not. Credit is falling like a rock. Bank are tightening lending to meet the new rules on higher capital ratios. We really could repeat what the Fed did in the 1930s," he said.
Charles Dumas from Lombard Street Research said Germany is drifting into Japanese-style deflation. The "output gap" is minus 7pc and profits have been squeezed by 30pc. "That means huge lay-offs, and even more severe cuts in wages," he said
Mr Dumas said German industry is facing a serious challenge from Asia as Chinese producers move up the technology "food chain". The effect is further price deflation for German goods, made worse by the strong euro.
What this crisis has shown is that Germany's export-led model has its limits. It depends on debt-driven consumption by the Anglo-Saxons, Spain, and other deficit spenders to keep afloat. They are all tightening their belts.
A few German economists have asked whether the country needs a new strategy, perhaps along the lines of neighbouring France – which has weathered the crisis better (so far) – but hardly a word crossed into the campaign.
Ms Merkel has always dismissed talk of global imbalances as an "Ersatz" debate, of little relevance to Germany. Events will determine whether she is right.
2. Angela Merkel faces demands for tax cuts as coalition talks begin
Angela Merkel, the German chancellor, was under pressure to take make quick tax cuts and take a tough stand on Turkey's bid to join the European Union as she launched coalition talks.
By Damien McElroy in Berlin
Negotiations between her Christian Democratic Union (CDU) and the smaller pro-business Free Democrats (FDP) opened in Berlin a day after voters gave the parties 332 seats, enough for a working majority, in the Bundestag.
Mrs Merkel pledged that the new cabinet would be in place before she greets foreign heads of government when Germany celebrates the 20th anniversary of the fall of the Berlin Wall on November 9.
Guido Westerwelle, the putative Foreign Minister and leader of the FDP, is pushing to deregulate the economy, cut spending and reduce taxes.
Mrs Merkel must also contend with emboldened officials in her own party. Leading CDU members want to shore up its heavily Roman Catholic core vote, which slipped to record low on Sunday, by ensuring the new government fights Turkey's entry to the European Union.
The CDU's last coalition partners, the Social Democrats, which depends on the votes of Germany's four million Muslims, had kept talks over Turkish entry alive despite widespread opposition to the bid. Germany will now join France and Italy in an outright rejection of Turkey's entry.
The FDP wants tax cuts of 35 billion euros (£32bn) whereas Mrs Merkel has promised to give back 15 billion euros over four years. Yesterday she said the first cuts would not be delivered until 2011.
She said: "We put forward our platform in the election and naturally we're not going to depart from it."
The 55-year old German leader confessed her fears that a move to rein in public spending too quickly could trigger an unforgiving recession.
"So long as we are in this trough the question of savings measures is not right," she said.
"We must do everything so that we do not experience what the Americans did at the end of the 30s namely saving [? -cs] straight into the small upswing that was becoming apparent after the crisis and so breaking this upswing."
There were demands for the new government to provide more support for Germany's troops in Afghanistan, particularly extra training forces for the Afghan Army so that security improves quickly and the military can come home.
The biggest selling daily newspaper Bild said: "The voters put their confidence in the Christian Democrats and the Free Democrats. Now Merkel and Westerwelle need to keep their word."
The worst results in fifty years for Social Democrats means the industrial workforce has lost its footing in the corridors of power and is already preparing to take to the streets.
Hartmut Meini, a powerful union leader in Volkswagen, warned the conservatives would trigger "a fierce conflict" with workers and unions if they called into question matters of social welfare or labour rights.
Posts
