First months of year were poor
The German economy shows no sign of recovering from the slowdown that set in last year, according to a report published by the Bundesbank in Frankfurt yesterday. The economy performed as poorly during the first few months of this year as during the gloomy autumn months of last year, despite the boost to exporters represented by the lower exchange rate of the euro against other currencies.
However, Bundesbank president, Mr Hans Tietmeyer said that the financial markets should not write off the euro's "enormous" potential.
In a speech last night in Frankfurt, Mr Tietmeyer said the initial euphoria which greeted the birth of the single currency in January and some exaggerated short-term expectations had "inevitably been followed by a certain disillusionment, and even disappointment".
That disappointment had, in turn, been reflected in the decline in the external value of the euro against the dollar.
Furthermore, political developments in the Balkans were also still playing a role, "at least in the short run", Mr Tietmeyer said.
"However, there is no reason at all to write off the enormous potential of the euro - which some people have seemingly been tending to do of late," he said, as the European Central Bank, as expected, held its key interest rates steady at the regular fortnightly meeting of its governing council. Economists predicted rates would stay where they were for the rest of the year.
On the German domestic front, the Bundesbank is blaming excessive pay deals for Germany's failure to kick-start its economy. It warned that big wage rises could prevent the centre-left government of the Chancellor, Mr Gerhard Schroder, from cutting the country's lengthy dole queues.
The bank's report claims that wage restraint ensured that employment in Germany grew last year for the first time since German unification in 1990.
"Some of the new wage agreements clearly go beyond the employment-neutral room for manoeuvre for pay increases during a difficult time for the German economy," it says.
But the bank acknowledges that international economic conditions have played a part in preventing the recovery many German firms were expecting this year. A lower demand for German exports in Asia and Eastern Europe, where Germany is more exposed than most of its neighbours, has counteracted most of the benefits of a lower exchange rate.
German companies remain pessimistic about their prospects and the balance between positive and negative views of the economic future is worse than at any time since the spring of 1996. Consumers are cautious too, despite tax cuts and an increase in child benefit.
Noting that Germany's public finances are likely to worsen in the medium term, the Bundesbank has urged the government to introduce a programme of spending cuts as soon as possible.
