Apr 23 2009

Germany’s crisis now a “catastrophe”

Published by at 7:56 am under Opinion,Top Stories

The latest round of economic growth forecasts for Germany were released yesterday and (as I suggested it would) the minus for this year got bigger yet again. The “most pessimistic” economists (in fact, they are the most realistic) now forecast a -6% for this year and another minus 0.5% for next.

This still falls short of my forecast of -10% for this and next year combined (look here). At this point I’ll revise my forecast “down” to somewhere between -8% and -10%, in other words, just short of a depression.

So, while everyone else is still getting more pessimistic, I’m getting (slightly, ever so slighly) more optimistic. As always, my forecasts are based on “animal spirits”, also known as “the confidence factor”, which is now such a hot topic worldwide (title of a best-selling book, which asserts homo economicus is driven NOT by rational behaviour, but by animal spirits, such as greed and fear – which is what I’ve maintained on this blog since 2005).  

But, let me get to the real issue: The German government’s response to the crisis (this morning called a “catastrophe” by the Financial Times Deutschland on its front page).

The real catastrophe remains the government’s reaction to the crisis. Yesterday Angela Merkel repeated that a third support package was not on the way. Other government officials said tax changes will be made, which they didn’t want to call “package number three” (because it’s too embarrassing).

Of course, the label is unimportant. It’s about what’s inside. And here the government STILL gets it all wrong. Yesterday they again spoke of tax relief for companies. And that, while we all know Germany is export-dependent and exports will underperform heavily in the next two years (demand slackened in the USA and other importing economies). To help Germany’s exporters in this environment will be like pushing on a rope – useless.

No, the government must look to the internal market now – and come with steps to support internal demand (the peoples’ buying power). With the outside market gone, the only alternative is to look at the internal market. And the best way to do this, is to give tax relief to the people (not the companies). And the best (and fastest) way to get extra money in the pockets of the people, is to drop the VAT rate.

It’s as simple as that. And yet, the rocket scientists in Berlin still don’t get it (or don’t want to get it.)

2 responses so far

2 Responses to “Germany’s crisis now a “catastrophe””

  1. adminon 24 Apr 2009 at 10:02 am

    I’ve looked at the numbers now (how the German economists came to their forecast of -6% for 2009 and -0,5% for next year) and I have pin-pointed the difference between my (rather pessimistic) view for next year and their far more optimistic forecast for next year (yes, in the circumstances a -0,5% can be described as “optimistic”).

    It lies in their forecast for exports: After a dramatic collapse of German exports in 2009 (-22.6% in a developed economy, where economists usually fight about whether growth will be 1,1% or 1,2%), the forecast is for exports to grow again in 2010 (+2,4%).

    That, I think, is rather “over-optimistic”. Even though the 2010 number was calculated off the very low 2009 base. The momemtum southward (down) is simply too high to be stopped and turned around so quickly.

    No, I think another (much smaller) minus would be closer to the mark. Therefore, I stick to my -2% to -4% for next year’s GDP (to bring us to a combined -8% to -10% for the period 2009 and 2010).


  2. adminon 28 May 2009 at 3:35 pm

    FTD reported yesterday that the German government was putting the final touches to a “secret” (the German word used: “heimliches”) third economic support package worth €12 billion.

    “Secret” (probably) because it is too embarrassing to admit that a third attempt at supporting the economy will, in fact, be made.

    Also, because Nr. 3 consists mainly of “tax clean-ups”, ie. amendments to the tax system to rectify earlier mistakes.

    So, my forecast on this (that there will be a third package), was spot-on. Sadly, my forecast that they will get it all wrong again – even on the third try – was also spot-on.

    The third package (again) doesn’t give immediate relief to consumers, but will give tax relief to (mainly) businesses – at the end of the current tax year.

    So, it’s another case of “wrong medicine” being administered.

    Will there be a fourth package? Yes, that’s not out of the question. But, it won’t be called a support package again. The German elections are looming and the new government might well cut taxes and/or announce a radical revamp/simplification of the tax system.

    The tax system revamp (if it goes through as the potential new governing parties foresee), will definitely give the economy a big boost (a few years from now).


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