Saturday, July 17, 2010

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Germany: Moderate austerity measures
Consolidation. The German government has finalized its austerity package. It intends to reduce spending by a total of EUR 81.6bn or just over 3% of GDP – albeit spread over four years. Furthermore, the government raised mandatory social security contributions.

Structure. At just over EUR 30bn, a large part of the cuts are to the welfare budget. Business (incl. banks and the nuclear power industry) is to contribute close to EUR 20bn. Administrative spending should be reduced by EUR 13bn, while subsidy cuts total roughly EUR 10bn.

Assessment. The German austerity package is quite balanced. It should be enough to successively lower the current record-high deficit and over the medium term help the government to comply with the ambitious debt rule anchored in the Basic Law. On the other hand, it is moderate enough, above all in the critical coming year, not to stifle the recovery of domestic demand (pages 4-6 & chart below).

Forecast. Nevertheless, German economic growth will lose momentum. Next year, real GDP will expand by only 1.5% (2010: +2% unadjusted). That is, however, primarily attributable to the phasing-out of the inventory cycle as well as the fiscal stimulus program. The global economic slowdown will also be a burden.

Criticism. The Achilles Heel of the consolidation is the questionable implementation of some of the measures, like the bank levy, as well as the heightened economic risks and the possible liabilities stemming from domestic & international guarantees. In any case, the government could have been much more courageous in slashing subsidies.

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