Changes are expected in Germany, which could in fact hurt the currently weak European growth.
It seems that the “grand coalition” government is looking at raising taxes and cutting the budget deficit, while not focusing on such things as labor market and welfare.
In the meantime, Angela Merkel, leader of the Christian Democratic Union (CDU), is poised to be the first female chancellor, after scraping by in a victory in Germany’s September election.
At the moment, the coalition between the Social Democrats and the Christian Democratic Union, the two major parties in Germany, is testy at best. They do not agree on various structural reforms suggested by Merkel, so they will try and focus on issues they can agree on instead — such as the country’s deficit.
But, this will mean that the general public will have to pick up where businesses cannot. Meaning that value added taxes will increase three percent, which could affect consumer spending — an area that is already facing troubling times.
Germany is the third-largest national economy in the world, and it makes up 30% of all economic activity in euro countries. Having growth slow again in Germany could affect growth in the rest of the continent as well. “The coalition is doing the only thing it can agree on,” Holger Fahrinkrug, economist at UBS in Frankfurt, said. ” ‘Managing decline’ is a fitting description for what’s happening.”
“The growth prospects of the whole euro zone will be harmed,” Thorsten Polleit, economist at Barclays Capital in Frankfurt, said. “The signal that Germany is sending to others on reform is far from encouraging. If Germany doesn’t move on reform, the French and Italians won’t either.”
This same type of situation went awry in Japan, sending the country spiraling into recession.
This news out of Germany is not good for the EU — and it’s not good for the global economy either. I’ll be staying tuned to see how Germany can counteract declining growth once again.