| |
| |
![]() |
| |
|
| |
|
| |
|
FRANKFURT: Germany, the eurozone's economic bulldozer, this week reached a critical but vaguely signalled crossroads on recovery from recession based on tax cuts.
Analysts are puzzled about the economic destination and Berlin's route to reach it.
Chancellor Angela Merkel, in the driving seat and proclaiming tax cuts with deficit spending, seemed to head for a highway marked "growth now, deal with debt later".
But some analysts wonder whether the basic intention is to head for "deficit now to restructure growth later".
The difference is substantial since the first choice implies a relaxed position on rising debt in contrast to Germany's historic attitude, and quickly raised objections from bystanders, notably German President Horst Koehler.
The second choice implies acceptance that deficit spending must rise to avoid strangling a recovery but conditional on structural reforms to raise investment and efficiency.
"Merkel is now moving into the role of speculator, betting at high risk on growth as the basis for all her promises," the business daily Handelsblatt commented. "All the relief and tax cuts are nothing but a third stimulus package."
But some say that if Germany also simplifies the tax code as members of the pro-business Free Democratic Party (FDP) want, it could trigger a shift in policy.
Streamlining the tax structure and cutting taxes "does represent an interesting shift toward a bit more of a supply-side agenda," said Holger Schmieding, senior economist at Bank of America Merrill Lynch in London.
Supply-side policies focus on easing constraints on how businesses operate and people make choices, in contrast to demand-side policies which stimulate demand and consumption.
Beate Jochimsen, professor of public finance at the Free University of Berlin, said Merkel might be turning "to a certain extent" to a supply-side model "because they are trying to foster investment decisions.
"If they do it, this would be a great reform. However it's only formulated in a very vague way so nobody knows exactly what's going to happen," Jochimsen told AFP.
Gernot Nerb, chief economist at the Ifo economic research institute in Munich, was more cautious. He told AFP there was "not yet" a shift towards supply-side reforms even though "maybe this is the idea of the FDP in the long run".
Nerb said this "would be more the case if we move to the three tax rate system" and if "we lower the rates substantially and abolish all exceptions to deregulate the economy".
But "this is an open question. This will probably take longer than four years," the length of a legislative term. Nerb also doubted the CDU would approve "such a radical step."
Jochimsen was surprised the government was mulling measures that would raise the deficit so soon after a law was passed that requires officials to begin cutting it in 2011.
"Nobody seems to realise that we will have trouble fulfilling the laws that we passed very recently," she noted.
But Schmieding said Berlin had a rare chance to boost the economy after previously slashing debt and entering the recession in better shape than many EU neighbours.
"Germany can afford it more easily than most others could and it just now happens to have the political opportunity to do so," he said.
Tax cuts are at the centre of Merkel's push for growth, but even these face hurdles, particularly in the form of objections from officials in Germany's 16 states, or Laender.
A new "debt-brake" law says the federal government's structural deficit must not exceed 0.35 per cent of gross domestic product (GDP) by 2016.
And a new right-wing government has been elected on campaign pledges for tax and health-care reforms to boost growth following the worst recession since World War II.
Many observers doubt the conservative Merkel, having ditched her former socialist partners, fully supports the agenda of her new allies, the FDP who favour supply-side reforms.
The coalition of Merkel's Christian Democratic Union (CDU), its sister Christian Social Union (CSU) and the pro-business FDP have agreed on tax cuts worth 24 billion euros (35 billion dollars), spread over four years.
These are in addition to about 20 billion euros in tax cuts which are already to take effect next year.
The FDP also pushed for major reforms to the health-care system and labour market but those may have been sidelined for now.
Merkel told ARD television last week only that "we will try to implement the things we've agreed on", namely tax cuts to bolster families and companies.
Two days earlier she had said: "We are focusing on growth, because growth is the way out of the crisis."
In response to an uproar over how that seemed to ignore a resulting increase in budget deficits, Merkel has since toned down her remarks.
Finance Minister Wolfgang Schauble told ARD that tax cuts approved in a contract signed by coalition partners would be implemented "as far as possible", starting in 2011.
European Union officials and some within the CDU urge Berlin, meanwhile, to remember that Germany has traditionally carried the fiscal discipline banner and that letting deficits soar sets a poor precedent for other EU members and places a heavier burden on the Laender.
German President Koehler, a CDU member, pressed the government to "work towards the goal of reducing state debt".
Finance ministry figures released in July estimated that as a result of two economic stimulus plans, Germany's deficit would violate EU rules until at least 2013, without the latest proposed tax cuts.
- AFP/so
|
