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Germany Tipping Into Deflation

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http://www.telegraph.co.uk/finance/comment...ession-era.html

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

Published: 8:54PM BST 28 Sep 2009

Clear signal: Angela Merkel's Christian Democrats will have to give ground to Germany's Centre-Right coalition, after winning the country's election with a clipped mandate Photo: Reuters 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).

It's not easy being pro-business these days"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 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.

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We should still remember that Westerwelle's Liberals (FDP) only got 14% of the vote, even though it represented a major improvement for them. The FDP is still very much the junior coalition partner, and if Guido becomes too demanding, the CDU/CSU can always threaten to abandon them for the SPD again. Anyway, he's far too cuddly (or so I'm told) to be an arch-Thatcherite. :P

Edit: Grammar

Edited by snowflux

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As long as it is not in this style.

Hugo%20Boss_SS%20Uniforms%201.jpg

uniform-ss_officers1-205x300.gif

If its good enough for our Royals, its good enough for Gordon

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Another telegraph article about the same thing. They say Germany is doomed because it makes things to sell to countries who can no longer afford them items. Well if the other countries can no longer afford the items, then the other countries are probably even worse off. Germany will still find new markets to export products too.

Also, wage reduction do not equate to deflation, just as wage increase do not have to equate to inflation. It means people get richer or poorer, and I'm sure Germany too will get a little poorer. It will probably still remain risher than most other nations on earth though.

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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.

So we just ignore the fact we have been in a boom then and try and get the economy back to boom levels?

Economic genius.

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So all the Global PR of green shoots and nothing to be concerned about is all a facade.

Offtopic slightly : Was in Antwerp at the w/e huge number of shoppers in the high street. ( Note. In the High street Not in the shops. ) Beats having to queue at the cash tills.

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[Hold on a minute, I thought Germany was out of recesssion according to the press. what a load of tosh , who can you believe????

Germany was out of recession for the sake of the election.

Election over the truth can come out as no one will be voted out of office.

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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

Was that before Labour decided to extend our scrappage scheme to keep the purchases of foreign cars at inflated prices going? Surely the champagne corks will have been popping a little in the executive lounges at VW and BMW when they heard that?

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