German Economy’s Worst Performance in Eight Years

Official figures were published yesterday showing that the German economy, formerly Europe’s powerhouse, shrank for the third quarter running at the end of 2001.

Gross domestic product in Germany rose by a mere 0.6 percent last year as compared to 3 percent in the year 2000. And analysts don’t expect any significant improvement till the second half of the year.

German Chancellor under fire

The news couldn’t have come at a worse time for a beleaguered Chancellor Schröder.

He is already under attack for the tattered state of the economy and an unemployment rate pushing towards the 4.3 million mark. He will have a hard time convincing voters to back his economic policies when he faces elections in September.

European Commission to pull up Berlin?

To add to his woes, the European Commission also indicated yesterday that it would send Berlin an "early warning letter" to get its fiscal position in order and ensure that it did not deteriorate further.

The Commission is due to assess Germany’s fiscal situation this month. Though the Commission said it did not intend to blacklist Germany, it’s obvious that the country’s precarious financial state has raised many eyebrows.

Under the European stability pact, countries have to keep deficits below 3 percent and aim to balance their budgets over the medium term.

Last year German public debt came dangerously close to the 60 percent upper limit set by the EU stability pact.

The Federal Statistics Office estimated total debt at 1.228 trillion euro ($1.085 trillion) equivalent to 59.5 percent of Gross Domestic Product. That was just a hair-breadth away from the 60 percent upper limit.

Government still hopeful

But German government officials are putting up a brave front and remain upbeat about business activity picking up in Germany as the world economy gradually gets back on its feet.

The government has even forecast growth of 1.25 percent this year. It remains optimistic that the economy will rebound as a result of falling inflation rates and recent tax and interest rate cuts.

But analysts expect the government to revise growth expectations for this year down to around 0.75 percent once the annual economic report is released at the end of this month.

Domestic factors to blame?

Predictably, German Finance ministry officials blame the sluggish and recessive state of the German economy on the September 11 attacks and the ensuing global economic slowdown.

But President of the German Federal Statistics Office, Johann Hahlen disagrees. He says most of the causes of Germany’s recessive troubles are to be found at home.

Official figures for 2001 show that low domestic demand and investment were the root causes of Germany’s economic downturn.

Private consumption grew only by 1.4 percent, the same as in the year 2000. Investment spending on machinery and equipment fell by 3.4 percent, after an 8.7 percent increase in 2000. Investment in the construction industry also plummeted by 5.7 percent.

Chancellor tries to stem damage

Chancellor Gerhard Schröder is now scrambling to take quick damage-control measures.

After the grave official figures were released yesterday, he said last night that he would use a high-level meeting next week between government, trade union and employers to urge moderation in pending wage negotiations.