Or at least that's how Wolfgang Clement the country's economics and employment minister sees it. In an interview with the Financial Times, he said 2003 must be a reform year for Germany. "It will also be decisive in determining the competency and strength of this government. It is a decisive year in all aspects." His declaration came as new data show that the German economy grew by only 0.2 per cent last year, its worst performance since 1993, sparking concern over growth prospects this year for Germany and its Euro zone partners.
"We are certainly going through a difficult phase, no question," Mr Clement said. "No one can accept a situation with 0.2 per cent growth and such high unemployment, myself included." Seasonally adjusted unemployment reached a four-year high last month of 4.2m.Mr Clement's comments came as Josef Ackermann, chairman of Deutsche Bank, last night attacked German reluctance to embrace reforms, insisting the country was "a prisoner of its status quo".
Pitching into the reform debate for the first time, Mr Ackermann said many people did not seem to appreciate "how serious the country's problems really were" and appeared to be trapped by existing social structures.He said Germany had long ceased to be the land of the Wirtschaftswunder, or economic miracle. Now commentators increasingly saw it as another Japan, trapped in a vicious spiral of slow growth and falling prices.Mr Clement said the European Union needed an "American approach" to setting interest rates, arguing that the rates set by the European Central Bank should be lowered to US levels.The ECB's policy of maintaining high interest rates was one explanation for Germany's economic problems, Mr Clement said. "From a German viewpoint, we need an interest rate policy similar to the American approach. That means sharp interest rate cuts."
Source: Financial Times
So does this mean the pressure on Euro zone rates is now really going to be on. And what if Germany needs to head for the zero-bound, where will this leave the inflation riddled Mediterannean trio - Spain, Greece and Portugal - flying upwards out of the window perhaps (as I often comment the Spanish expression 'saliendo disparados' says it all). No idle question this in a week that sees Gustav Horn, Head of Macro Analysis at Germanys leading economic research institute thinking the unthinkable and asking the 'D' question, Germany on the road to deflation?
The outlook for the German economy is bleak. Given the still moderate pace of global economic activity, the deep crisis of confidence on capital markets and a hesitant monetary policy in the euro area, there is not much leeway for a production expansion all over Europe. In addition to that, recently published intentions of the German coalition government point to a marked reduction in public expenditure accompanied by a significant increase in taxes and social security contributions. Consequently, fiscal policy will be very restrictive next year. Against this backdrop, the German economy will almost stagnate towards the end of next year, again falling behind the rest of the euro area.
A matter of great concern is the development of prices. Already the German inflation rate is one of the lowest in the euro area, and accordingly real interest rates are higher than in the rest of the euro area, hampering a recovery. In such a low growth environment prices will be under heavy pressure. In the course of this process the German development is beginning to resemble the Japanese one at the beginning of the 1990s more and more. The Japanese deflation also started with a crash on stock markets, a lack of confidence and reduced wages in line with the cutting of bonus payments. For some years this just led to low inflation rates until price development turned negative during the mid nineties.
The general advice in such a situation is that monetary policy should reduce interest rates swiftly to prevent the unfolding of a deflationary process right from the beginning. However, in a monetary union such a course is only appropriate if the union in aggregate is negatively affected. At some later stage this will doubtless be the case. But a swift loosening may not be possible as long as inflationary tendencies in other countries are close to the stability target. In that case only fiscal policy could deliver immediate help. But the German government has blocked this road by planning to observe self-imposed deficit targets. Therefore there is a danger that the German policy mix may lead to a prolonged phase of stagnation, and this could easily prove to be the beginning of the dead end road to deflation.
Source: DIW Berlin, Economic Outlook