Getting Germany back on track

 

Germany appears to be in the grip of its people's most familiar affliction: a bout of angst. According to a closely watched economic indicator - that of the ZEW research institute - the joy of the World Cup has been replaced by growing pessimism, while the impetus it gave to the economy of its host nation is spent.

The latest ZEW index suggested that economic confidence has fallen back to its lowest level since 2001. Bad news is also evident from data showing that, like their Irish counterparts, German consumers are worried about rising debt levels and interest rates; and this in an economy blighted by mass unemployment.

As the engine of the euro zone economy - accounting for over one-quarter of its total economic output - Germany's problems are our problems. It purchases at least one-eighth of our exports. Moreover the composition of those exports includes a balanced mix of high technology and lower technology - but more employment-intensive goods than is the case with some other trading partners.

German elections have shown an electorate that continues to be reluctant to abandon the social model of generous welfare provision and extensive public services. The result has been a worsening budgetary position in a country whose pensions burden will approach crisis levels within a few decades. In her address to the annual congress of her Christian Democratic Union (CDU) party in Berlin on Tuesday, German Chancellor Angela Merkel also had to deal with criticisms that her reform programme was not ambitious enough.

Where a coalition with the CDU's traditional partners, the Free Democrats, might have led to a braver reform agenda, an inconclusive election last year forced the CDU into coalition with its rival Social Democratic Party (SPD). Reductions in income taxes - vital to stimulate employment - will be paid for not by cuts in public spending, but by higher rates of indirect taxation. This strategy is a significant contributor to the decline in confidence which threatens to stall the German economy's recovery and, by extension, the recent upturn in the euro zone economy.

How ironic it is that we are approaching the tenth anniversary of the formation of the EU Stability Pact. For it was on the insistence of a German finance minister that countries wishing to participate in economic and monetary union agreed to abide by a code of fiscal discipline. At the time, Ireland was one of the countries with which Germany feared to share a currency.

Ireland bravely accepted the pact's terms and adhered to them with flying colours, only to see Germany - under the chancellorship of Gerhard Schröder - disregard the pact flagrantly. The student has now become the master. If Germany's economy does indeed relapse into slowdown, its electorate may have to conclude that the time has finally come to accept a strong dose of its own medicine. In doing so, it can draw inspiration from that medicine's success in reducing unemployment in Ireland to the lowest level in the EU.