[A-List] Germany: political crisis

["Michael Keaney" <michael.keaney@xxxxxx>]

'Make-or-break' year for German reform
By Hugh Williamson in Berlin and Tony Major in Frankfurt
Financial Times: January 17 2003

This year will be make-or-break for German government hopes of implementing
much-needed reforms, the country's economics and employment minister said on
Thursday.

Wolfgang Clement  (pictured )said the reputation of the coalition government
of Gerhard Schröder, chancellor, was on the line if breakthroughs on
economic reforms were not achieved. 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 pledge 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 in Europe's largest economy.

"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."

Mr Clement said reforms would reduce labour market rigidities and cut
through red tape. He said laws covering employee dismissals in small
companies needed to be relaxed - a proposal likely to stir trade union
opposition.

The government confirmed that the budget deficit last year was 3.7 per cent
of gross domestic product - more than the limit set for eurozone members.

The breakdown of the economic growth figures for 2002 showed that only a
strong export performance, up 2.9 per cent, stopped the economy from
contracting last year as private consumption fell and investment dropped.

But economists warned that the recent rapid rise of the euro was likely to
depress export growth in the months ahead. Economists said the poor GDP data
suggest the German economy contracted by about 0.1 per cent in the final
three months of 2002 and warned that the first quarter of this year might
prove even weaker.

"There is every chance a technical recession - at least two quarters of
negative growth - is now under way in Germany," said Martin Essex, senior
economist at Capital Economics.