Merkel Boasts of Growth While German Confidence Drops

German Chancellor Angela Merkel (to whom President Bush gave the infamous St. Petersburg neck rub) crowed about Germany’s economic growth over the week-end. She proclaimed that the German economic doldrums had passed, stating that Germany was no longer “the sick man of Europe.” Someone should have told German investors, whose confidence has dropped to a five year low. Such mixed feelings.

Proclaiming that the German economy has “turned the corner,” Frau Merkel pointed to the unemployment rate which is down to 8.2% from 9.5% at the beginning of the year. Also, the Germans had 0.9% economic growth in the second quarter of 2006, which was announced last week, and which was actually faster than US growth. Moreover, the German government’s budget deficit is shrinking.

However, the Mannheim-based ZEW economic institute released its economic sentiment index showing that the index dropped by 20.6 points to a negative 5.6 points in August. That’s the seventh straight monthly decline, and the index is now at its lowest since June 2001. ZEW said that the index suggests “a considerable economic downturn within the next six months.”

The underlying reasons for the disappointing index results are numerous. First, there is a solid belief that the US economy is slowing, and as American demand dips, Germany exporters will suffer. Second, a rising euro is already doing some harm. Third, oil prices are not coming down, and the impact that has worldwide can’t be good. Fourth, there are planned changes to corporate taxation in Germany that make the picture uncertain. Last, the value-added tax is going up in Germany in January to 19% from 16%.

This could be all the good news Germany gets for a while, and Frau Merkel has had her moment of economic happiness. By the same token, France is enjoying the best growth it has had in 20 years, 1.9% annualized. Next year, that growth could be 2.5% according to some analysts. Will that be good enough to help Germany? It is too early to tell, but if the European Central Bank will hold rates steady in October, Germany needn’t suffer too much. What is the bigger worry, an overheated French economy or a German recession?

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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