Pain Grows As German Economy Weakens

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Copyright © 2001 The International Herald Tribune | www.iht.com

Pain Grows As German Economy Weakens

John Schmid International Herald Tribune Wednesday, August 8, 2001 Rising Jobless Figures Add to Litany of Woes That Hem In Berlin FRANKFURT A steady flow of weak economic data, punctuated Tuesday by a seventh consecutive monthly rise in unemployment, is raising fears of a recession in Germany, the traditional powerhouse of the European economy.

"It is deteriorating more rapidly than even some pessimists had thought," said Adolf Rosenstock, European economist in Frankfurt for Nomura International.

The severity of the slowdown has taken the government by surprise and confounded its economic planners. With little more than 12 months until the next election, Chancellor Gerhard Schroeder has come under mounting criticism from business groups because he has put long-awaited but unpopular deregulation plans - touted by many economists as a way to spur growth and hiring - on hold in order to keep unions on his side.

Germany, while still by far the largest economy in Europe, now lags behind all 11 other members of Europe's single-currency bloc in this year's growth projections. As demand wobbles in Asia and North America, Germany's export-driven industries find themselves competing in the toughest climate since the early 1990s.

The Federal Labor Office dented Mr. Schroeder's hopes anew on Tuesday when it reported that unemployment in July rose by a seasonally adjusted 11,000 workers from June. That left the seasonally adjusted jobless rate unchanged at 9.3 percent.

The unadjusted figures, which often lead news broadcasts, surged to 3.79 million, or 9.2 percent, from 8.9 percent, or 3.69 million, in June.

Even as the agency published its figures, the German chemicals giant BASF AG announced its second round of mass layoffs of the summer. It will cut 1,200 jobs, bringing the total job reductions to 4,000. Like the rest of the German economy, BASF is dependent on exports and has been hit hard by rising oil prices. (Page 14)

The nation's flagship air carrier, Lufthansa AG, said it would cut the number of its flights to "counteract the sharp downturn in the world economy." Other blue-chip companies, such as the electronics giant Siemens AG and the truckmaker MAN AG, have recently laid off thousands of workers.

In other reports this week, manufacturing, seen as a critical leading indicator of activity, fell 2.5 percent in June from May, the fifth monthly decline this year. The drop was led by an 8.5-percent collapse in domestic orders for capital spending on factory equipment and machine tools. That prompted worries that the export slowdown has started a chain reaction of belt-tightening at home as companies cancel investment and hiring.

On Tuesday, the ministry said industrial production in June fell 0.4 percent, its third drop in four months.

Economists now generally expect data to show that the German economy shrank by 0.2 percent in the second quarter. If those expectations prove to be true when the federal statistics office releases preliminary second-quarter GDP figures Aug. 23, it would mean that Germany performed even more poorly than the slowing U.S. economy during the period.

Furthermore, "there is a risk that any recovery in the third quarter would be timid," said Elga Bartsch, economist in London at Morgan Stanley Dean Witter. If the economy declines for two straight quarters, it would meet the technical definition of a recession.

For now at least, economists do not see any stimulus on the horizon. Mr. Schroeder has rebuffed demands that he move forward his next phase of tax reductions. A first round of tax cuts, which took effect Jan. 1 and liberated 55 billion Deutsche marks ($24.8 billion), failed to prevent the downturn. Mr. Schroeder's finance minister, Hans Eichel, refuses to deviate from an austerity budget that is intended to keep Germany within the guidelines on European monetary union.

Mr. Schroeder has turned down opportunities to tinker with time-honored laws that strictly regulate hiring and firing conditions. Business groups say that liberalization of the job market, along with further moves to deregulate the retail industry, could give the economy a boost.

The chancellor also has rejected pleas for new tax cuts or spending on the grounds that they cannot be financed. He repeatedly cites Japan's decade-long slump to show that economic pump-priming can be ineffective as well as costly. Some economists believe that Germany, which has been dragged down by its unique burden of financing the reconstruction of eastern Germany, could rebound in the fourth quarter or next year.

But opposition conservatives are putting Mr. Schroeder under new pressure to act. A leading member of the opposition Christian Democrats has outlined a plan to force unemployed Germans off the welfare rolls if they are able but unwilling to work. The plan, proposed this week by the Hesse state premier, Roland Koch, is the most radical labor-market proposal that has surfaced in years.

Mr. Koch, who will apply to the upper house of Parliament for permission to start the project in his home state, bases his plans almost entirely on the "Wisconsin Works" project carried out during the past decade under a former U.S. state governor, Tommy Thompson, who now serves as U.S. secretary of health and human services under President George W. Bush.

Conservative opposition leaders Tuesday used the jobs numbers to attack Mr. Schroeder's approach, which a leading Christian Democrat, Matthias Wissmann, labeled "do-nothing."Another potential source of stimulus, the European Central Bank, has been loath to act. Unlike the U.S. Federal Reserve Board, which has cut rates aggressively this year, the ECB has cut rates only once, as it concentrates on fighting inflation.

Copyright © 2001 The International Herald Tribune

http://www.iht.com/articles/28703.html

-- Martin Thompson (mthom1927@aol.com), August 08, 2001

Answers

If Germany is 1/3rd of the European economy, wow, then the EU and the euro are in deep doo-doo. It looks like, as did the Pied Piper, Germany is leading Europe over the cliff. Gerhardt Schroeder, an uttterly incompetent boob, is, undoubtedly, the worst head of state Germany has had since World War II. Conrad Adenauer, who led Germany our of the ashes of World War II in the late 1940's and early 1950's must be turning over in his grave.

-- JackW (jpayne@webtv.net), August 08, 2001.

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