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November 22, 2005

Germany's Economic Blueprint

It's official:

Angela Merkel was sworn in Tuesday as Germany's first female chancellor, heading a bipartisan government that's seeking to turn around Europe's leading economy.

Merkel assumes office after a tumultuous post-election period, forcing her center-right Christian Democratic Union-led alliance to turn to Gerhard Schroeder's center-left Social Democrats to form a ruling coalition, and ceding key government posts in the process. The September election resulted in a stalemate.

Merkel, Germany's eighth head of state since World War II, will be working with opposition members including Peter Steinbruck, who will be finance minister, and Franz-Walter Steinmeier, who will be foreign minister...

The parties agreed on several strategies to boost the German economy, which has suffered from unemployment of over 11% and virtually non-existent domestic consumption.

Here is a rundown of that strategy, from the London TimesOnline:


BUDGET: Bring budget deficit into line with EU’s 3 per cent of GDP cap by 2007; said to require a minimum of €35 billion in cuts and new revenue

TAX: VAT to rise 3 percentage points, to 19 per cent, in 2007; reduction in tax incentives/exemptions from Jan 2006, such as scrapping tax breaks on new home purchases

ECONOMY: €25 billion to be invested in research and infrastructure. Small and medium-sized companies boosted by tax breaks and simpler rules on writing down value of plant and equipment against tax

ENERGY: Continue gradual decommissioning of nuclear power stations by 2020. Aim to generate 12.5 per cent of total electricity output from renewable sources by 2010, 20 per cent by 2020

LABOUR: Job protection measures to be reduced; probationary period for new recruits extended to 24 months from present six. Long-term jobless benefits in eastern Germany to be raised to western level

PENSIONS: Retirement age to rise to 67 from 2012 to 2035. Benefits to be frozen for four years, contributions to rise 0.4 percentage points, to 19.9 per cent of salary, from 2007

The headline from the TimesOnline article about says it all:

Now for the really difficult bit

UPDATE: Maybe even more difficult than everyone had hoped.  Edward Hugh points to a Financial Times report on weakening consumer spending plans in the eurozone, which he characterizes as "sobering news."

November 22, 2005 in Europe | Permalink


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This reminds me of the Churchillian phrase "this is not the end, but simply the begining of the end". Of the reform process I mean. The FT pointed out that this is likely to be the most fiscally conservative government in recent German history, which contextualises a bit their worries about what might be going on over at the ECB.

Posted by: Edward Hugh | November 23, 2005 at 01:24 AM

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