Merkel to lead ‘sick man’ Germany as first female chancellor

GERMANY has been the sick man of Europe for almost a decade and despite major attempts by Gerhard Schroeder and his Social Democrats (SPD) to introduce reform, the country’s growth remains among the slowest of any EU country.

For Chancellor-to-be Angela Merkel the challenges are likely to be even more difficult than they were for Mr Schroeder.

With unemployment rates of 11% and growth predicted to be a sluggish 1% next year, something needs to be done.

Last December German business leaders were optimistic about the economy improving because of the reforms brought in by the SPD. But it failed too quickly the record unemployment rate instead continued to depress the entire Eurozone.

However, Mr Schroeder, despite grasping the nettle and moving against his own grassroots supporters, was unable to get agreement on them in committee frequently because of disagreement from Ms Merkel's CDU.

Now the two parties are united in a red-black coalition, their weights more or less equally balanced given the division of ministries.

Ms Merkel at her press conference yesterday promised a "coalition of new possibilities."

Many agree that if this coalition is to succeed, then it has to grasp a whole range of possibilities, and approach Germany's problems in a different way.

Joachim Scheide from the Kiel institute said: "We need the state to invest more and to really lower taxes so that the private sector has breathing room."

Time and time again over the past few years the experts have predicted that Germany's position as one of the four slowest growing economies in the euro zone was about to change.

They based this on the strength of Germany's exports one of the largest exporters in the world, exporting manufactured goods despite competition from low-wage countries.

The problem has been a lack of confidence in the domestic market as German's added to their savings.

Ongoing talks, negotiations and plans for reforms and the constantly restated threats of economic slides and widespread unemployment have frightened off consumers further from spending their money.

The challenge now for the grand coalition will be to boost domestic demand. However, if predictions of a down turn in global demand next year materialise, German exports are likely to be badly hit.

Ms Merkel has indicated she wants to bring the country's budget deficit as close as possible to the 3% limit of GDP required of euro zone countries at a time when it is heading for a fourth year of breaching the limit.

This gives her little scope for increasing state spending to help boost the economy or to reduce taxes as the SPD would like. Many predict that increasing VAT to allow a reduction in unemployment insurance, will add to the record 5.2 million out of work.

At risk too are her promises to reduce both the top and bottom rates of income taxes and to fund this by scrapping some of the myriad tax relief schemes.

Employers hoped for and welcomed the election's outcome, especially with their promises to reduce the power of the trade unions on wage agreements and make firing workers easier.

The SPD has been willing to introduce a light version of these reforms but have been wary of union warnings that anything heavier will result in nation wide strikes threats that have been repeated over the last few days.

Economist Andreas Rees with HVB Group in Munich said even hammering out a policy for government could prove extremely difficult, and that this should be agreed by October 18 when the new parliament is due to hold its first session.