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Friday, June 06, 2003

Germany in Worst Crisis Since 1945


This is one opinion, and it gives a flavour of the atmosphere which is devloping here in Europe now. One would alsmost say a sense of resignation was setting in.

Germany is in danger of breaching the European Union's budget deficit rules next year because of the country's "worst financial crisis since 1945", finance ministers from Germany's 16 federal states said on Thursday. The warning reflected heightened concern over the country's severe financial problems, following indications by Chancellor Gerhard Schröder on Wednesday that Germany might overshoot the 3 per cent budget deficit limit for the third consecutive year, in 2004. In a unanimous statement issued after a meeting in Berlin, the finance ministers, who include both Social Democrats and Christian Democrats, said: "Adherence to the 3 per cent budget deficit ceiling. . . is in danger". In contrast to Mr Schröder, Hans Eichel, finance minister, has insisted Germany will comply with its commitments to Brussels. Barbara Hendricks, Finance Ministry state secretary, admitted on Thursday, however, that it would be "very difficult to return below 3 per cent" in 2004, and it would only be possible if economic growth reached 2 per cent next year.
Source: Financial Times
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At the same time Germany now has the lowest short term interest rates since 1875:

The European Central Bank on Thursday cut interest rates by half a point to 2 per cent, their lowest level since the second world war, amid growing gloom at the state of the eurozone's economy.

Amid fears of deflation in Germany, short-term interest rates in the country have fallen to their lowest level since 1875, when records began. Ten-year US Treasury bond yields briefly fell to a 45-year low, dragged down by poor data on demand for unemployment benefits and factory orders, and expectations of matching Federal Reserve rate cuts.The cuts had been foreseen by markets and were praised by political leaders. Wim Duisenberg (pictured), ECB president, said there had been a "high level" of agreement on the cut, but an even larger one had been "mentioned" during the governing council's meeting.
Source: Financial Times
LINK

And obviously there's more to come. Note the subtle nuance: no liklehood of sustained deflation in the 'eurozone' (as a whole). But, of course, if Germany and Italy enter forcefully, this remains to be seen.

Wim Duisenberg, the European Central Bank's president, dismayed many economists on Thursday by playing down what he called the "hypothetical risk of deflation" in the eurozone, and in Germany in particular. In what is expected to be one of his last appearances explaining an interest rate decision, Mr Duisenberg raised hopes of further cuts when he said he expected inflation to remain at about its current level of 1.9 per cent, and then "fall significantly" next year. With the ECB committed to keeping inflation close to 2 per cent, the prospect of a significant fall should prompt further cuts. However, Mr Duisenberg also said there were no forecasts indicating any risk of deflation - a sustained fall in prices - in the eurozone. He said ECB policy aimed to "anchor" inflation expectations close to 2 per cent.
Source: Financial Times
LINK

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