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German report
by Euro Reporter
2014-10-15 10:02:49
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Germany rejects calls to spend more to stave off recession in Europe

German Chancellor Angela Merkel ’s government rejected calls for it to boost public spending and retreat from its promise of a balanced budget amid mounting evidence of a slowdown in Europe’s biggest economy and the threat of recession across the Continent. The government in Berlin on Tuesday slashed its growth forecast to 1.2% from 1.8% for 2014 and to 1.3% from 2% for 2015. Separately, a measure of analyst confidence in the Germany economy fell into negative territory for the first time in nearly two years, the latest in a troubling string of indicators for what until now has been the driving economic force behind Europe’s recovery. German officials said the rough patch—which they attributed to weak demand in the eurozone and emerging markets, as well as geopolitical crises—wouldn’t derail plans for a balanced federal budget in 2015, provided that things didn’t get much worse. The promise has been so central to Ms. Merkel’s domestically popular politics of fiscal prudence that German politicians and journalists often refer to the balanced budget by shorthand: die schwarze Null, or the Black Zero. Economics Minister Sigmar Gabriel, presenting the government’s reduced growth forecast, insisted there was “no cause for alarm” because employment in Germany was continuing to grow and economic indicators, while unsatisfactory, didn't portend a recession.

“And there is certainly no reason to leave or to change course in the economic policy, financial policy, or the social and labor policy of the federal government,” Mr. Gabriel went on. “We’re not going to help the German economy with some flashes in the pan and more debt.” Mr. Gabriel’s comments appeared aimed at damping a debate in German media and political circles in recent days over whether it was wise to stick with the balanced budget and forgo additional government spending that could jump-start economic growth. They were also a message to critics of German fiscal conservatism in the U.S. and across Europe that Berlin intended to stay its course. The Black Zero was one of Ms. Merkel’s campaign promises last year, and fanfare accompanied last month’s unveiling of the government’s budget proposal, which included no new debt. A government news release about the budget trumpeted it as a historic success and called Germany the fiscal role model for Europe. While Germany hasn’t had a federal budget surplus since 1969, the country has been in compliance with the European Union’s strict deficit rules for years. Its overall public-sector budget—including the budgets of Germany’s 16 states, all municipalities and the welfare system—has been in balance since 2012. But economic challenges, driven both by global security crises and by weakness among buyers of German goods in Europe and in emerging markets, have clouded the political acclaim for Ms. Merkel’s budget. Some economists and news media wondered whether a single-minded focus on avoiding borrowing was the best course when Germany benefits from ultralow interest rates but suffers from aging infrastructure.

By Monday, the debate spilled into the open in Ms. Merkel’s governing coalition. Some members of her left-of-center junior ruling partner, the Social Democrats, questioned the conservative chancellor’s course. Social Democrat deputy Chairman Ralf Stegner said a balanced budget shouldn’t come at the cost of investment in education and infrastructure, quipping, “the Black Zero is not a Social-Democratic Zero.” But the balanced budget remains a popular goal. On Sunday, a headline in the populist, mass-circulation Bild am Sonntag newspaper proclaimed: “The Zero Must Stand!” Mr. Gabriel, who is also a Social Democrat, echoed Ms. Merkel’s balanced-budget line in his remarks. The minister has sought to establish the Social Democrats as a party capable of fiscal prudence as he looks ahead to national elections in 2017. The chancellor herself made no public comments on the matter Tuesday.

Over the weekend, policy makers from various countries peppered German Finance Minister Wolfgang Schäuble with criticism of Berlin’s fiscal course at an International Monetary Fund gathering in Washington. Germany’s focus on a balanced budget, some European and IMF officials say, is putting a brake on growth just as a feeble eurozone needs a boost from the German economy. One member of the German delegation at the meeting, lawmaker Norbert Barthle of Ms. Merkel’s Christian Democrats, said he was unmoved by the criticism. Germany has to stick to its Black Zero pledge even if it means reducing spending to maintain confidence in its fiscal discipline, Mr. Barthle said in an interview. “Time and again, there are calls for us to do more for investment,” said Mr. Barthle, who is responsible for budget policy in Ms. Merkel’s parliamentary bloc.  “But this is a purely economic analysis that completely disregards the political implications of what would happen if we were to give up this goal,” he said. “We would massively destroy trust.”


Germany seen close to recession after ZEW investor sentiment survey plunges

Germany’s ZEW institute doesn’t rule out a recession in Germany, after a plunge in the ZEW sentiment survey Tuesday added to evidence that the eurozone’s most powerful economy is on the skids. ZEW President Clemens Fuest said he couldn’t rule out an economic contraction in the third quarter. “We are getting close,” Mr. Fuest said at a news conference following the release of the survey data, however he noted any recession would likely be short-lived given Germany’s strong domestic fundamentals.

Gross domestic product shrank 0.6% in the second quarter from the previous three months. A recession is defined as two consecutive quarters of economic contraction.  The ZEW survey of financial analysts measuring sentiment slumped into negative territory, to minus 3.6, considerably weaker than the average forecast of 0.8 in a poll by The Wall Street Journal, after September’s 6.9 figure. This is the first time the reading has fallen below zero in nearly two years (November 2012).

The survey follows a number of weak German data releases, such as August’s steepest on-the-month fall in exports since the 2009 recession, flanked by tepid figures on industrial output and manufacturing orders. Last week, the International Monetary Fund revised its view of the eurozone, raising the likelihood of recession to nearly 40% from just over 20% in April, while German economic institutes chopped their consensus growth forecast for this year to 1.3% from a 1.9% forecast in the spring. Sentiment on current conditions in the ZEW survey also tumbled more than 22 points to a reading of 3.2, compared with 25.4 in September.


Germany's austerity obsession could take down the global economy

Austerity is the opposite of the gift that keeps on giving: It just keeps taking and taking. Germany, the world's homeland for austerity obsession, is learning this firsthand. Its economy has hit a rough patch lately, likely worsened by its adamant refusal to spend just a little bit more money to keep things moving. This has Europe on track for its third recession since 2008, which has raised the threat of a global economic slowdown, which has rattled financial markets from Hong Kong to New York. Thanks, Germany! Thanks, austerity! Germany last week reported its biggest one-month plunge in factory orders since the bad old days of the 2009 recession/depression, as you can see from this chart:


Germany also posted its biggest one-month drops in industrial output and exports since 2009. Germany is Europe's economic engine, and it appears to be driving the continent right into a recession. Take a look at the red line on this recent chart from Citi Private Bank showing how corporate spenders in various parts of the world feel things are going:


After decades of pinching deutsche marks, Germany is pretty much the only country in Europe with the spare cash to throw at this problem, as you can see from this chart by research firm Pantheon Macroeconomics:


Global economic leaders at International Monetary Fund meetings in Washington this past weekend hammered on Germany to spend some of its money, already. But German Finance Minister Wolfgang Schaeuble declared that "writing checks" won't fix economies and even urged France and Italy to take on more austerity. Schaeuble's refusal to change is the latest example of a long-lasting German fetish for austerity, tracing back to the years after World War I, when inflation got so bad that Germans toted cash in wheelbarrows. Germany's economic psyche was so scarred that it vowed to avoid inflation forever. Sounds reasonable, and that approach has worked out well for Germany -- until recently. For the past several years it has resisted using its cash stockpile to help itself or its neighbors, despite an ongoing depression, and it has insisted that its neighbors be just as austere as Germany, plainly worsening the depression. It's a pathology that pretty much everybody else in Europe and the world now sees, but Germany refuses to admit -- even though its infrastructure is starting to crumble along with its economy.

So it falls on the European Central Bank to try to keep Europe's economy afloat -- but Germany is fighting that, too. ECB chief Mario Draghi wants to try out some Federal Reserve-style bond-buying soon, but the head of Germany's Bundesbank is kicking and screaming against the idea, causing a distracting rift at the top of the central bank. Austerity fever -- egged on by a now-discredited research report that claimed government debt is bad for economies -- has been hurting economies around the world since the Great Recession.  Countries on Europe's periphery like Greece and Italy have been forced to swallow painful economic reforms, worsening their depressions. In the U.S., the harshest government-spending cutbacks since the end of the Vietnam War have hurt growth, too, though the effects haven't been nearly as strong as in Europe. Still, a lack of funding for medical research in the U.S. is a big reason we don't already have an ebola vaccine, the Huffington Post's Sam Stein reported.  Austerity just keeps finding imaginative new ways to be terrible.


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Emanuel Paparella2014-10-15 15:48:04
Déjà vu? In theory, or on paper, there is an ideal union based on democracy and justice, whose rock bottom foundations are vociferously proclaimed to be solidarity, social justice and the common good. In actual practice, what is constantly being exhibited are utilitarian principles of competitiveness, self-interest, selfishness, distributive injustice and profits for profits’ sake whose fruits are the exploitation of the poor and the underprivileged, be they individuals or nations, all parading as "virtuous, sober austerity; what some social scientists have aptly dubbed “social Darwinism,” or, even more cynically, “savage capitalism.”

William James, the father of pragmatism, had it on target when he pointed out that if one wishes to know what people's belief system really is, one ought to pay attention not so much to what they publicly proclaim rhetorically, but to what they do in practice. In other words, the words of a wise man in Palestine some 2000 years ago: “ beware of wolves in sheep’s clothing...; by their fruits, you shall know them.”

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