More Bad News from Europe’s Largest Economy

The newly appointed German Chancellor Angela Merkel recently talked of a rising sales tax, resulting in a plummet in the consumer confidence rating.

 Between high energy costs, high unemployment rates, and rising taxes, German consumers are feeling cash-strapped this holiday season, which is showing in decreased spending.

 I told you recently about Merkel’s appointment to the position, which she won only marginally. In addition, there were many members of her own party that did not believe she was the right candidate for the position.

 That said, she has been elected into power, but consumer confidence is waning, in part due to her proposed tax increases. This is especially notable during a time when spending is typically higher — the holiday season. Many Germans, however, are not spending more – they’re tightening their belts this year.

 “The growing certainty of a sales tax increase during coalition negotiations rattled consumers’ hopes for an economic recovery,” GfK economist Rolf Buerkl said in a release. “The chances for a clear turnaround in consumption depend heavily on how energy prices and taxes affect people’s budgets. A fundamental change won’t take place until the labor market opens up.”

 Even business confidence suffered after the news of a tax hike. The intent, according to Merkel, of increasing sales tax by three percent is to create new jobs and cut costs for companies. But 80% of Germans do not believe that the new chancellor can even cut unemployment.

 “It’s not that Germans don’t have money to spend,” Klaus Wuebbenhorst, CEO of GfK, said. “They’re concerned about jobs, and that’s what affects confidence at the end of the day.”

 This concern will transcend into holiday shopping cuts, made all the more worrisome for Germans because of high fuel costs, which will be especially felt during the winter months.

 “Consumers have been shaken by political discussions, but that should come to an end in the next few months,” Karsten Junius, economist at Dekabank in Frankfurt, said. “We could see strong consumption in 2006 because people will want to make the purchases they’ve put off for a long time.”

 For the German economy’s sake, I hope Junius has it right. And I’m sure Merkel is hoping for the same.