Saturday, November 12, 2005

Enough? Berlin Questions / Europe / German election - Germany’s new policy agenda

It certainly wasn't a message to please that the Merkel government presented as it disclosed the results of the long weeks of coalition negotiations.

Obviously it is consolidation of the public finances that has been given priority. The expected 3 per cent increase in VAT will make its contribution to that goal, as will numerous different cutbacks and other changes in the taxation system.

The fear is of course that this VAT increase, which does not go into effect until 2007, will keep domestic consumption down, thus preventing growth from reecovering in the way necessary in order to create new jobs.

But no one really knows.

It might be that the combination of the rather modest structural reforms included in the backage and the certainty that the federal budget will not be sliding out of control will have a confidence boosting effect that will make consumers somewhat more optimistic for the future.

In that case, we might well see growth and employment figures starting to get better during the coming year.

But overall it's difficult to see that this package alone will be sufficient in addressing the different structural challenges of the German economy. Four years is a long time, however, and it is highly likely that we will see policies evolve during that period.

In the meantime the increase in the strength of the competitive forces coming from the East of Europe and the East of Asia will continue to drive the micro reforms of Germany as well as the other economies of Europe.

That, over time, might well be more important than yesterdays package out of Berlin.