Unemployment main threat to Germany qualifying for EMU

 

RISING unemployment represents the biggest threat to Germany's efforts to keep its budget deficit low enough to qualify for entry to European Monetary Union (EMU), according to official economic forecasts released in Bonn yesterday.

As expected, the annual report by the economics ministry predicts economic growth of 2.5 per cent for 1997, an improvement of more than 1 per cent on last year.

Unemployment is expected to rise by 200,000, bringing the jobless rate to 11 per cent of the workforce and placing a massive burden on Germany's finances.

The government revised earlier estimates of the level of public debt, predicting a budget deficit of 2.9 per cent, just inside the upper limit permitted for entry to EMU.

Economics Minister, Mr Guenter Rexrodt, admitted that economic growth would be too meagre to have an immediate impact on the jobless rate. But he insisted that Germany remained on course to qualify for EMU and predicted the job market would improve by summer.

Consumer spending is expected to rise by 1.5 per cent during 1997 and exports to grow by 6.5 per cent, with Germany's share of the world market remaining unchanged.

With one of the highest income tax rates in Europe, Bonn has little room for manoeuvre as it attempts to improve its public finances. Further spending cuts are likely to be politically impossible, so Finance Minister, Mr Theo Waigel, has set his sights on increasing revenues by blocking loopholes in the tax system.

This is the background to his call in Brussels on Monday for more uniform tax rates within the European Union and for an end to tax incentives offered by member states such as Ireland and Luxembourg.

Ireland's 10 per cent corporate tax rate has attracted numerous multinational companies, to the chagrin of many other EU member states. Bonn is especially frustrated with the German banks and financial institutions who are setting up of "back offices" in Dublin to take advantage of Irish tax laws.

Mr Waigel complained on Monday that such competition was unfair and that crucial tax revenue was being siphoned off.

Opposition politicians dismissed yesterday's economic forecasts as unrealistic, a view that was echoed by economists. The German Institute for Economic Research predicted that growth in eastern Germany was likely to fall to 1 per cent, making a national growth rate of 2.5 per cent impossible to achieve. Employers' organisations and bankers also described the report as optimistic.