Köhler urges Merkel to take more action on reforms (FT)

Angela Merkel, German chancellor, returned from holiday on Thursday to face renewed pressure not to waiver from economic reforms, as federal president Horst Köhler added his voice to business leaders and economists calling for more determined action.

President Köhler told foreign correspondents in Berlin that the German chancellor should not become complacent simply because of recent positive economic data. German economic growth in the second quarter, at 0.9 per cent, was the highest in five years, and adjusted unemployment, which fell to 4.4m in July, was the lowest since 2004.

Government leaders have been quick to welcome the improvements but Mr Köhler said: “What’s important is that we not only celebrate the good economic news but work to ensure growth becomes lasting and more dynamic. We know that one swallow does not make a summer.”

Although the president – a former head of the International Monetary Fund – has a largely ceremonial job, he comments more regularly than his predecessors on economic issues and in his remarks to the foreign press stressed an especially sensitive point for the chancellor.

He said that while he agreed with the government’s broad reform agenda – focused on budget consolidation plus health and corporate tax reforms – the way the chancellor’s left-right coalition explains its actions to the public was below par.

“One could improve the [coalition’s] communications”, he said, adding that the coalition should “use more examples to make clear how the reforms are paying off”. The comments by the president – a Christian Democrat ally of the chancellor – are awkward for Ms Merkel as they reflect public disquiet with her recent performance.

In an opinion poll this week her ratings among voters as their preferred chancellor fell below the 40 per cent mark for the first time since she took office last November. Her 37 per cent score compared with 55 per cent six months ago.

A complicated package of health sector finance reforms put forward in July was savaged by business and health experts, with complaints from her own supporters that the measures had been poorly presented.

The economic upturn has also pushed the government on to the defensive over its planned 3 percentage point hike in value-added tax next January, with CDU politicians and business executives arguing that the move is no longer necessary. Peer Steinbrück, finance minister, this week ruled out withdrawing the tax increase.

Mr Köhler warned the finance minister that the extra tax revenues from the VAT increase should not mean less enthusiasm for budget savings.

On her part, Ms Merkel sought to play down the negative political mood, arguing that her priorities this autumn were the health and corporate tax reforms, as well as further labour market changes.

Her most immediate challenge is to identify how Germany will contribute to the United Nations peacekeeping force in Lebanon while avoiding scenarios where German troops could be expected to shoot at Israeli soldiers or civilians.
Copyright The Financial Times Limited 2006