A measured Merkel (FT.com)

A measured Merkel
By Bertrand Benoit in Berlin

Published: November 24 2008 19:47 | Last updated: November 24 2008 19:47

Perhaps it was the grey suit, a departure from her usual red or orange wardrobe. But when leaders of the world’s 20 largest developed and developing economies convened in Washington this month to tackle the world financial crisis, participants could not help noticing how Angela Merkel faded into the crowd of her largely male colleagues clad in similar hues.

For most of her three years in office, Germany’s chancellor has shone on the international stage, helping forge a global consensus on climate change or healing a rift in the European Union over the fate of its aborted constitution. Yet as the world faces its gravest economic threat in nearly a century, the woman once dubbed “Miss World” by a German tabloid has receded into the background.

As President Nicolas Sarkozy of France and Gordon Brown, the UK prime minister, bask in praise at their decisive handling of the crisis, the talk in Whitehall, Brussels and the ornate palaces of the French Republic is of a Germany that has relinquished any claim to leadership in Europe. Having failed to appreciate the gravity of what was happening, Ms Merkel first sought to block a European response and, when she finally acted, did so in a half-hearted way.

Yet an alternative version of the story, being told in Berlin, suggests a more complex picture. A closer look at Ms Merkel’s management of the crisis suggests she may have been neither as obstructive nor as lacking in vision as her European neighbours paint her. Domestically, she has shown clearer leadership than she is often given credit for abroad and her popularity remains as high as ever. With a general election less than a year away, she seems well positioned to return to the chancellery.

On the surface, there is no shortage of evidence suggesting Germany has lost its way. Take Berlin’s approach to the failure of Lehman Brothers in September. Days after Paris and London started calling for a systemic response – the multi-billion euro bail-outs eventually adopted across the continent – Ms Merkel and Peer Steinbrück, her finance minister, were still sticking to a case-by-case strategy. The chancellor insisted there would be “no blank cheque for the banks”.

As rumours emerged that Mr Sarkozy was considering a €300bn ($384bn, £255bn) European rescue fund for the continent’s banks, Ms Merkel and Mr Steinbrück declared that they would have none of it. Only after weeks of negotiations between Paris and Berlin, culminating in two summits in the French capital last month, did Germany change its stance, signing up to a joint European framework – what Ms Merkel dubbed a “toolbox” of measures – within which member states would take simultaneous action to salvage their respective banks.

The mood has not been helped by Mr Steinbrück’s abrasive personality. Many a counterpart has grown wary of his short temper and long lectures about the alleged superiority of Germany’s “three-pillar” system of commercial, co-operative and public sector banks. Mr Sarkozy in particular has developed an animosity for the Social Democrat. “The two really hate each other,” says one Berlin official.

Even after Berlin had yielded and endorsed a more co-ordinated approach to the crisis, it persisted in taking unilateral moves. A day after the first Paris summit, Ms Merkel announced that the state would guarantee all private deposits in Germany. Her failure to inform European partners sent officials in Paris and London scrambling for their telephones. Alistair Darling, UK chancellor of the exchequer, later told parliament he could find no one at the German finance ministry to explain the measure.

“Europe’s largest economy is giving the impression that it is now acting in a purely national way – no longer in a European way,” says Joshka Fischer, the former foreign minister and Green party leader. “This is a big concern because the economic crisis will put the European project, including the euro, at risk.”

Berlin’s subsequent decisions also drew criticism. While its €500bn rescue fund was Europe’s largest, the tough penalties it imposed on the banks seeking capital injections or guarantees for their debt, and the absence of any compulsion for weakly capitalised institutions to participate, mean it has yet to attract much interest from a sector fearful of stigmatisation.

“I can only assume they designed the plan this way because they thought it would be cheaper,” says Hermann-Otto Solms from the opposition Free Democratic party.

A €12bn, two-year package of growth-boosting measures adopted this month by Ms Merkel’s cabinet drew a thumbs-down from economists. They see it as a drop in the ocean given that after three years of solid growth, Germany has entered a recession. The German government’s economic advisory council of “wise men” called the package “a loose collection of disparate measures” and said it should be at least four times as big.

So has Germany stumbled? Officials close to Ms Merkel insist it has not. The chancellor, they say, is merely the victim of superior Franco-British spin.

Germany’s apparent reluctance to embrace a co-ordinated European bail-out, for one, was a carefully calibrated decision, they say. As the debate raged, Berlin was trying to rescue Hypo Real Estate, a lender that was the most high-profile German casualty of the Lehman collapse. Too much talk of a blanket bail-out, says one Merkel adviser, would have undermined Berlin’s efforts to persuade the banks to bear part of the €50bn rescue deal for HRE – which they eventually did.

Backstage, however, Ms Merkel was engaging Paris over a co-ordinated approach. At the height of the crisis, Jens Weidmann, her top economic adviser, was in daily contact with François Perol, his Elysée counterpart.

Ms Merkel’s shooting down of the European fund idea was also right, the official insists. The idea of endowing the European Commission with full discretion as to how to spend German taxpayers’ money was so bad, he says, that Paris has since denied having ever entertained the notion. Berlin also points to the US, which abandoned an initial plan to acquire illiquid assets and has since adopted a state-financed recapitalisation programme with a European flavour, as evidence that the swiftest decisions are not always the right ones.

The adviser says Ms Merkel took an active part in shaping the European scheme. “But there would have been no point trying to steal the spotlight from Sarkozy,” the official says. “It is in the man’s nature to court attention and he holds the [rotating] EU presidency, after all. Merkel was very active. She just did not make a big show out of it.”

Even the controversial deposit guarantee, the official says, was no different from similar pledges made earlier by Mr Darling and Mr Sarkozy, though he concedes it was poorly communicated by the finance ministry, which presented it as the equivalent of Ireland’s much criticised move to guarantee all bank debt – which it was not.

As for Germany’s bank rescue package, it may not have attracted much interest from   financial institutions, says a finance ministry official, but as a de facto guarantee that no bank will go bankrupt it may provide sufficient confidence for the sector to regain its footing – at a fraction of the cost faced by British taxpayers.

The fact that the unprecedented rescue package was enacted in less than a week was no mean feat considering that Ms Merkel, head of the Christian Democratic Union, heads a fractious “grand coalition” with her Social Democratic rivals and operates in a federal system. Indeed, no bill has been enacted as fast since emergency anti-terror legislation in the 1970s.

Politically, too, Ms Merkel has not played a bad hand. All opinion polls since the crisis broke out showed her adding to her comfortable lead as Germany’s most popular politician. Apart from Mr Fischer’s comments and further disapproving noise from the weak and fragmented opposition, she has faced little criticism at home. “Merkel shows people that she cares and people trust she is in control,” says Manfred Güllner of the Forsa polling group. “When she says she is not rescuing the banks to bail out managers but to preserve people’s jobs, it strikes a chord.”

Economic experts including the “wise men” have praised the government’s crisis management for averting a bank collapse – though some have also expressed misgivings about the architecture of the rescue package and the size of the fiscal stimulus.

Ms Merkel’s CDU is not nearly as popular as she is but it remains well ahead of the SPD in the polls. While holding an election today would probably not yield a centre-right majority, it would ensure her re-election either as leader of another “grand coalition” or at the head of a three-way ruling alliance with the FDP and the Greens.

CDU officials say their party does well in times of economic uncertainty, because voters credit it with more competence in that area. But Jürgen Falter, professor of political science at Mainz University, thinks the recession will favour the left once unemployment starts rising sharply. Moreover, the financial storm and the recession have already torn apart Ms Merkel’s re-election strategy, which was to focus on Germany’s underperforming education system and trumpet economic recovery as her main achievement.

The crisis has raised questions about the chancellor’s ability for improvisation and it has tested her preference for making decisions based on careful assessment. Ms Merkel has not stumbled yet at home but she will have plenty of opportunity to do so before the election next September.

Copyright The Financial Times Limited 2008

Germany in recession (FT.com)

Germany in recession
Published: November 13 2008 09:42 | Last updated: November 13 2008 20:29

Germany’s recession is now official after a 0.5 per cent fall in third quarter gross domestic product. This was worse than expected. The real shock was how badly exports have been hit as demand slumps worldwide. Export growth, which was powering ahead strongly, could come to a complete halt next year.

Thursday’s data offered up one bit of positive news – a small increase in consumer spending. But this looks unsustainable. True, German consumers have more to fall back on compared with their more profligate counterparts in the UK and the US: the savings rate in Germany has actually been increasing. Furthermore, the labour market has continued to improve, which has helped to strengthen disposable incomes. But that will not last. The employment outlook is bleak. Bank of America forecasts a 500,000 increase in the number of unemployed next year. Consumers fearful of job loss are unlikely to open their wallets, even if they have no pressing need to rebuild tattered finances.

Such dire numbers, especially if echoed across the rest of Europe, now make interest rate cuts from the European Central Bank more than likely. A 50 basis points cut in December from the current 3.25 per cent looks in the bag and most expect rates to come down to 2 per cent early next year. Less certain is whether the German government will feel the need to do more on the fiscal front. It has already conceded with one package but shows little appetite to do more.

Employers will urge workers to do their bit to improve their chances in a tough job market by embracing wage restraint – Germany’s largest trade union has just moderated its pay demands. That might temper, but not significantly offset, the damage from a global slowdown. Of course, when the cycle turns again, German households and companies will be relatively well-placed. Right now, that is cold comfort.

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Copyright The Financial Times Limited 2008

Fast decline throws Germany into recession (FT.com)

Fast decline throws Germany into recession
By Ralph Atkins in Frankfurt

Published: November 13 2008 08:23 | Last updated: November 13 2008 19:20

Germany has officially plunged into recession with economic activity contracting much faster than expected in the third quarter, intensifying fears about the depth and duration of continental Europe’s downturn.

Gross domestic product in Europe’s largest economy fell by 0.5 per cent in the three months to September, extending a 0.4 per cent drop in the previous quarter, the German statistical office reported.

Eurozone data on Friday would show the 15-country region also in technical recession, defined as two consecutive quarterly falls in GDP, economists forecast.

It could show a decline of as much as 0.3 per cent in the third quarter, after a 0.2 per cent contraction in the second quarter, they said.

The rapid pace of the deterioration raised fears that the final three months of this year and early 2009 would be even bleaker, with effects of the recent near-collapse of the banking system still to hit. “The worst is yet to come,” warned Gilles Moec, European economist at Bank of America. “After September and October, we will have a very sharp contraction in corporate investment because of funding difficulties.”

Signs of a turnround are not expected until well into 2009, raising the prospect of a downturn across Europe on a scale not seen since the early 1990s. The Paris-based Organisation for Economic Co-operation and Development on Thursday forecast the eurozone economy would shrink by 0.5 per cent next year, driving unemployment significantly higher.

The speed of the decline, which accelerated after the collapse of Lehman Brothers in mid-September, will add to the pressure on governments to kick-start growth through fiscal stimulus packages. The European Central Bank has already signalled it will cut official interest rates further in December, after cutting its main policy rate by half a percentage point twice within a month in the most aggressive policy loosening phase in its 10-year history.

In Germany, the shock waves created by Lehman Brothers’ collapse severely jolted business confidence at a time when the country’s reliance on global growth was already proving a weakness, with even emerging market economies slowing. Andreas Rees, German economist at Unicredit, said the traditional German economic motor – by which demand for its exports feeds through into investment and jobs – had been thrown into reverse. “The big problem is that fiscal policy is not that powerful against a downturn in the global economy,” he warned.

The Bundesbank agreed that “the broad global economic slowdown is becoming increasingly noticeable”. The German statistics office reported consumer spending had seen a “slight increase” – probably as a result of tumbling oil prices. French GDP figures on Friday could also show households faring relatively well but economists warned that, as in Germany, the fourth quarter could prove much worse.

The sharp economic deterioration and lower oil prices have transformed the eurozone inflation outlook. Lucas Papademos, ECB vice-president, on Thursday told a Frankfurt conference marking 10 years of the euro that if inflation was under control, interest rates could “be employed to mitigate the impact of financial market stresses” – a clear sign that the ECB is willing to play a part in reviving growth.
Copyright The Financial Times Limited 2008