http://www.guardian.co.uk/leaders/story/0,3604,1442178,00.html German jobless Save less, spend more
Leader Monday March 21, 2005 The Guardian Few will take pleasure from worsening unemployment in Germany which led to last week's fresh installment of corrective measures. They include plans to cut corporate taxes from 25% to 19%. This will be financed in a Gordon Brown-ish way by closing of tax loopholes so as not to worsen the country's budget deficit, which has exceeded the Maastricht ceiling of 3% of gross domestic product for three years. The latest package - a response in part to increased competition from the low tax rates adopted by the countries of eastern Europe that have recently joined the EU - is unlikely by itself to cure the country's growing economic woes. But it is another step in the right direction. The tax only affects bigger corporations, since smaller ones pay income tax. Unemployment in Germany has risen to 12.6%, or 5.2 million people, the highest level since the 1930s. While much of it is concentrated in the former East Germany - where the rate is 30% in some parts, despite a massive injection of resources by the federal government - it has reached as high as 20% in parts of the Ruhr, the heartland of Chancellor Gerhard Schroeder's Social Democratic party. Germany is by no means a basket case. It is the still world's biggest exporter, partly because its premium engineering goods have avoided the debilitating effects of a strong euro. As a result, it has a bumper trade surplus of $196bn (compared with Britain's deficit of $106bn) and its citizens save a high proportion of their earnings. That is part of the problem. If they saved less and spent more, then the lack of consumption that has dogged the economy might start to correct itself. But in troubled times, the understandable psychology is to save for the future. In an ideal world Germany would lower interest rates, as Britain did, to stimulate the economy. This should be bolstered with further labour market reforms to promote growth. But Germany does not control its interest rates any more. The European Central Bank does and the government is reluctant to lower taxes when Germany is under EU pressure to cut borrowing to below the onerous 3% ceiling laid down by the Maastricht Treaty. If Germany wants to raise its economic growth rate to a level that would start to cut unemployment, then it must look to the ECB for a lead in reducing rates. If the ECB could help restore growth in Germany, Europe's biggest economy, then the rest of the EU would soon feel a warm glow that is badly needed as the voting on a new constitution gets underway.
