independent

Sunday 20 April 2014

Euro crisis distracts Merkel from German economic slide

German Chancellor Angela Merkel

GERMAN Chancellor Angela Merkel's economic machine is beginning to show signs of neglect.

As the continent's growth engine and self-appointed fiscal paragon orders budget cuts for its peers, investors, economists and policy makers are starting to warn Germany is turning a blind eye to its own weaknesses. Joerg Asmussen, a European Central Bank board member nominated by Merkel, has gone as far as to predict a return to the status of 'Sick Man of Europe' should they go unfixed.

Without Mrs Merkel and a largely supportive German electorate ready to back over €300bn in bailouts and guarantees, Europe's debt crisis could have already broken up the single currency. This has distracted her from signs of economic drift at home as labour costs rise at the fastest pace in a decade, erasing most of the progress made under predecessor Gerhard Schroeder.

"Merkel has had to work with the cards that history has dealt to her and Europe has been a priority," said Irwin Collier, professor of economics at the Freie Universitaet in Berlin. "But you have to do a lot of things at the same time, and it's clear things have to change at home too."

The chancellor, in office since 2005, thus far has had to do very little to the economy.

The unemployment rate sank as companies from BMW to Siemens helped Germany maintain its place as the world's largest exporter after China. The benchmark DAX Index rose 29pc.

Mrs Merkel faces her third general election in autumn, with the economy projected by the Bundesbank to expand by as little as 0.4pc over the year.

In her New Year's television address, she warned that the economic environment could be yet more difficult in 2013.

Eurostat data show that the cost of Germany's workforce is on an upward path while the competitiveness of euro area peers like Spain is improving. Unit labour costs have risen more than 3pc since 2009, compared with an almost 7pc decline in Spain, figures from the EU statistics arm show. The cost of German workers has risen an estimated 8.3pc since Merkel came to power.

Still, with unemployment near a 20-year-low and locally made high-technology machinery and cars achieving record sales across the globe, Germany doesn't look like its on the verge of economic malaise.

That's bolstered Mrs Merkel's popularity. Four out of five Germans think she is performing well as chancellor, according to the ZDF Politbarometer. If an election took place now, 40pc would vote for her Christian Democrats, leading the Social Democrats by 10 percentage points. (Bloomberg)

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