What Kevin Told Me Last Weekend

When my friend Kevin, a research engineer at a major Tier-2 automotive parts supplier, called me from a business trip in Germany this weekend to tell me that German Chancellor Gerhard Schroeder had announced that he wished to hold early elections, I couldn’t help but wonder how this decision fits in to the current German economic landscape.

Germany is the largest economy under the Euro umbrella and the third largest economy in the world, so what’s going on in the German economy is usually a good predictor of things to come across Europe.

First things first, let’s look at the impossible-to-ignore jobless numbers in Germany. In April, the jobless number actually dropped slightly, but not enough to be of consequence to the 4.98 million people, or 11.8% of the nation’s workforce, who are unemployed. To compare, the rate of unemployment is typically around 5% in the UK and the US.

In November of last year, you may recall Michael Lombardi’s commentary on German unemployment. At that time, unemployment was at a five-year high of 10.7%, rising for nine months in a row. Clearly, things have not improved since.

Second, Germany’s growth has slowed to a crawl. Earlier this year, the country’s top economic institutes announced growth predictions in the 1.5% range. A couple of weeks ago, these forecasts were downgraded to about 0.7%.

Third, interest rates have held at 2% for about two years in Europe. Even though growth is slowing, the European Central Bank is likely to keep rates unchanged for the foreseeable future.

Fourth, the International Monetary Fund has also slashed its 2005 forecast. Germany is now at 0.8% from its earlier 1.8%.

Fifth, oil prices continue to soar in Europe — and the Euro itself is losing ground, currently at a seven-month low against the dollar. Add these factors together and it’s clear that there are cost pressures on Germany and its trade partners. This is also reflected in the decline in Germany’s benchmark DAX 30 Index.

Sixth, it’s not easy to call an election in Germany — The constitution of the country has made it so that only a vote of non-confidence in a chancellor can initiate a president to dissolve the house and call an election. We haven’t seen such an event in German history since 1982.

The Social Democrats, a major political party in Germany, said Chancellor Schroeder’s sentiments were “political suicide.” The consensus is that the current government could collapse if an early election is called.

The vote of confidence is scheduled for July 1, 2005.

After the announcement, the OECD (Organisation for Economic Cooperation and Development) revealed that German investor confidence is at its lowest point in six months, dropping from 20.1 points in April to the current 13.9 points. This data represents the results of a survey of 298 German analysts and institutional investors conducted by The German Centre for European Economic Research.

As a result, the OECD reduced its growth forecasts for Germany in 2005 and 2006 to 1% from 1.2% and 1.6% from 2.1%, respectively.

Analysts believe that Germany’s heavy dependence on foreign demand and global economic developments is impacting its ability to grow domestically. With slowing growth the world over, Germany’s export-driven economy can’t help but suffer, especially when the trouble is compounded by throngs of cash- strapped unemployed Germans.

The fact is, Germany’s economy is ailing. So why would any political figure with a grain of common sense want an early election?

Such a decision can only be explained as an act of desperation.

In a meeting between President Bush and Chancellor Schroeder last year, Bush said, “When Germany and America work together, the world is a better place. We’re both committed to freedom; we’re both committed to peace; we’re both committed to the prosperity of our respective people.”

Looks like Schroeder isn’t as committed to his people’s prosperity as he used to be. Let’s hope North American politicians never become so desperate.

Back to Michael for a few last words…

Some readers e-mailed to ask what restaurants I frequent in New York City, so here it goes. For Italian, I go to Bice on 54th (Jack Welsh must like it too, because I often see him there). For steak, and it’s a hard choice, I go to The Palm on 50th (I met Brad Garrett, character “Robert Barone,” from “Everybody Loves Raymond” there last week).