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With Zero Growth, Germany To Borrow Billions

Just as the German government seeks to expedite passage of one of the most ambitious reform packages in the post-World War II era, it admitted just how badly Europe's largest economy is suffering on Thursday.


With zero growth and a soaring deficit, where is Germany's economy headed?

Following the recent downward growth forecast revisions of the country's leading economics institutes, the Economics Ministry on Thursday said the German economy would stagnate this year. Minutes later, the Finance Ministry jumped on the bad news bandwagon, announcing that deficit spending for the year would reach a previously unsurpassed €43.4 billion ($53.1 billion.)

Though Economics Minister Wolfgang Clement shaved estimated growth from 0.75 to zero for 2003, the news did come with a silver lining. In 2004, the government expects modest growth of 1.7 percent.

But like the economic forecasts in recent months, which have been revised downward one after the other, Clement's latest look into the crystal ball holds equal perils for the federal treasury. Demonstrating the uncertainty of the government's fiscal prognosis, Clement said growth could fluctuate between 1.5 percent and, if things go exceedingly well, 2 percent.

"Important indicators have been pointing towards a recovery for some time now," Clement told journalists at a press conference in Berlin.

The most important condition, Clement said, is for the global economy to continue to show signs of improvement, especially the expected recovery in the United States. The forecast also assumes there will be no major shifts in exchange rates or dramatic fluctuations in oil prices.

Reforms crucial

He also warned that improved economic growth would only be possible if the government’s reforms of the labor market as well as the proposed overhaul of the health and pension systems were fully implemented. Clement added that ongoing and often rancorous cross-party bickering over Schröder’s reform agenda were not in the interest of people in this country and urged the opposition conservatives not to block the reforms in the country's upper legislative chamber, the Bundesrat.

Additionally, he said, it is vital to fuel consumer spending through lower income taxes and prevent non-wage labor costs from rising further. Clement added that a favorable development of the national economy next year also depended on a euro not being too strong against the dollar to support German exports.

Qualifiers aside, the talk on Thursday was not of a full-fledged economic upturn, but rather that of a "recovery."

A whopping deficit

Der Schatten von Finanzminister Hans Eichel

Hans Eichel: a minister in the shadows.

Casting a further shadow over Clement's news on Thursday was an announcement by Finance Minister Hans Eichel that deficit spending for 2003 would exceed €43.4 billion -- billions more than the €18.9 billion originally estimated. Eichel submitted a request for the additional borrowing to the Bundestag, Germany's parliament, on Thursday.

"This €24.5 billion difference is half the result of lower tax revenues and half the result of additional labor market expenditures" stemming from Germany's high number of jobless, Eichel said.

The announcement is also likely to sound the alarm bells in Brussels, where the European Commission had been expecting a 3.8 percent budget deficit for Germany. The additional expenditures mean Germany's deficit spending will now rise to over 4 percent for 2003 -- well above the 3 percent limit in the Maastricht Treaty's Stability and Growth Pact, designed to underpin the euro.

For the first time, Eichel also admitted Germany would exceed the 3 percent limit in 2004, too, meaning the country would violate EU monetary policy regulations for three years in a row. The announcement drew immediate criticism from opposition quarters.

"Up till now, there's never been such an inaccurate estimate from the office of the finance minister," said Friedrich Merz, deputy chair of the Christian Democratic Union's parliamentary group. "Given what we have heard both from the economics minister and the finance minister, I'm not optimistic that the government is aware of the scale of the problems we are dealing with in this country."

Privatizations and subsidy cuts

More bad news is expected when Eichel issues his next tax revenue estimate on November 6. Experts have warned that the government faces reduced tax revenues in excess of €6 billion in the coming year. The Finance Ministry is hoping to ease the burden on state coffers by selling more shares in Deutsche Telekom and Deutsche Post, the national postal service monopoly. Eichel is also calling on the government to press ahead with planned federal subsidy cuts.

The latest round of borrowing is expected to bring Germany's total federal deficit up to €820 billion. Taken together with state and community-level deficit, that figure would grow to €1.4 trillion.

That will place additional stress on the country's already overburdened coffers. In 2003, alone, the government has to pay €40 billion in interests payments on its borrowing.

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