Germany’s return to growth may have boosted Chancellor Angela Merkel’s re-election, but difficult times for the economy lie ahead.
Merkel has vowed to seal a coalition deal with the FDP. They want large tax cuts despite a ballooning budget deficit and government stimulus programmes that are set to run out. Chief analyst at Baader Bank Robert Halver said: “We will have a more market-friendly government. That’s good for the equities but with regard to the high level of debt we’ve got in Germany, any reform policy is constrained.” Merkel’s CDU has sworn to chop tax across the board by about 15 billion euros, but that could leave little room to counter a double dip. Head of DIW Institute Klaus Zimmermann said: “The new government will have a huge problem. They have promised tax cuts and they will somehow have to live up to that pledge. But after taking a close look at the books, they will find out that the budget deficit will continue to grow massively.” Many are warning of another credit squeeze. Last month, Germany’s Deputy economy minister said small and mid-size companies, which provide 70 percent of all jobs, would face tougher loan conditions in the first half of 2010. The world’s biggest exporter was hit for six by the global contraction in sales and unemployment could jump significantly and consumer spending plummet as government aid programmes finish. Germany’s five billion euro ‘Cash for Clunkers’ scheme ended last month, but figures indicate that overall consumer spending has not stabilised.