Eichel's budgetary measures yet to convince Germans

While Berlin's budget plans may have raised a few eyebrows, the real test is whether after years of stagnation the economy can turn the corner, writes Derek Scally.

The final days of 2004 saw Germany’s finance minister, Mr Hans Eichel finally shed his Stability Pact sackcloth after Brussels put its budget disciplinary action on ice.

Berlin has undertaken to reduce its budget deficit to 2.9 per cent of gross domestic product (GDP) in 2005, just under the 3 per cent ceiling Berlin breached for three successive years from 2002.

"The Commission has recognised that German finance politics is on the right course, even in a very difficult economic situation, and will once again meet the European criteria next year," said Mr Eichel.

His finance ministry officials say that Berlin will be pushing for an open and honest discussion of the Stability Pact reforms when EU finance ministers meet in March, to allow more budgetary flexibility in times of economic downturn.

But Mr Eichel’s budget consolidation measures have, in the space of a week, raised the eyebrows of leading economists, the Bundesbank and opposition politicians.

Mr Eichel sold off 138.3 million Deutsche Telekom shares worth €1.6 billion to the state-owned development bank, the KfW.

Further asset sales are planned in the new year, prompting opposition politicians to attack what they call irresponsible attempts to fill budget holes and pacify Brussels by hocking the family silver.

Mr Eichel’s other pre-Christmas money-spinner, to sell off the family gold, didn’t go quite according to plan. Germany has gold reserves of 3,400 tonnes and the Bundesbank could, in theory, have sold up to 120 tonnes by September 2005, raising a very welcome €1 billion for Mr Eichel. But the Bundesbank, in a show of independence, decided to sell just eight tonnes, something Mr Eichel said was "very difficult to explain".

Mr Axel Weber, the Bundesbank president, didn’t mince his words when he responded: "The reserves are part of the wealth of the people and have a high symbolic value. Gold sales should not be an alternative to sustained budget consolidation." Mr Eichel will have to look elsewhere for quick cash.

One source could be Russia, which has promised to pay back debts worth around €10 billion by 2007, giving Berlin an unexpected €2 billion a year. However, Berlin’s budget consolidation hopes hinge on growing expectation that, after years of stagnation, the economy has finally turned the corner.

German business confidence recorded a surprise jump in December, reaching its highest level in eight months. Long-heralded social welfare reforms came into force yesterday, along with a tax cut the government hopes will encourage Germans to open their wallets.

"An improvement in spending is in sight for 2005," said Mr Norbert Walter, chief economist at Deutsche Bank, on German television. "I cannot see how Germans will maintain their refusal to spend."

Retailers said they were happy if not ecstatic with Christmas trade. Spending was up 1.3 per cent, with consumers spending nearly 70 billion more than last year. But spending is still dampened by job anxiety. Unemployment remains firmly fixed at 10 per cent at the end of the year and the headline jobless figures will jump in January, on paper at least, as a result of new criteria for counting the country’s jobless following the social welfare reforms. Germany’s economic institutes have all revised down their economic forecasts at the end of last year.

The Ifo institute in Munich has reduced its growth forecast to 1.2 per cent, while Hamburg’s HWWA predicts 0.9 per cent. Both predictions are down from the 1.5 per cent forecast in October by the so-called "six economic wise men".

The ever-changing numbers game has been a source of frustration for the economics and labour minister, Mr Wolfgang Clement, who spent this year talking up the German economy.

"I fear this competition among forecasters isn’t helping sentiment," said Mr Clement. He says economic forecasting has become "a lottery game" in Germany and that he had no reason to change Berlin’s growth prediction of 1.7 per cent growth for next year.