GERMANY HAS no plans to scale back €80 billion worth of austerity measures despite a windfall of €20 billion in unexpected income this year.
The news may revive the debate, ahead of this weekend’s G20 summit in Toronto, about whether Berlin’s cuts will save or strangle euro-zone growth.
The news came as the closely-watched Ifo business confidence index rose higher than anticipated this month. The index, based on interviews with 7,000 managers in all industry sectors, rose to 101.8 in June from 101.5 in May – after analysts predicted a slight fall.
Though managers were happy with their current business, the economists at Munich’s leading Ifo institute warned of clouds ahead.
“Companies are more happy with their current situation but their optimism has weakened somewhat regarding the development of business in the next six months,” said the Ifo’s Prof Hans-Werner Sinn. “Export business will not increase as strongly as to date, nevertheless they see their prospects in foreign business as very good.”
The general optimism in the wholesale and construction sectors was not matched in Germany’s troubled retail sector: although dissatisfaction with business is down compared with May, managers give a sober reading of their retail prospects to the year-end.
That slow domestic demand was the only cloud on Germany’s economic horizon, said economist Carsten Brzeski of ING Belgium in an investor note.
“The export engine is humming and should make the second quarter a real smash,” he wrote. “For the time being the inventory cycle, strong global demand and weak euro will continue to support the export-led recovery.”
Economist Jörg Kramer of Commerzbank was similarly optimistic.
“We’re in a period of very, very strong economic growth,” he said. “Driven by foreign demand, the recovery will continue in the second half of the year – albeit at a slower pace.”
Adding to the rosy outlook was the news that federal finance minister Wolfgang Schäuble is enjoying an unexpected windfall. His ministry will earn an extra €20 billion this year thanks to a higher-than-expected corporate tax take and the proceeds from a recent auction of fourth-generation mobile phone frequencies.
According to reports, Mr Schäuble can expect to cut borrowing by some €20 billion from the €80 billion he was preparing to borrow this year. The budget deficit for 2010 is now expected to be about €60 billion.
“Even that is still a record,” said Otto Fricke, budget expert of the junior coalition partner, the Free Democrats. “There is no option but to cut spending.”
