New glimmers of hope in Germany

As in most other countries of 'Old Europe', the shops and offices in the towns of cities of Germany are half empty in the summer season. Parking has become easy for a while and the daily social strife has been shelved for the time being.

More people, however, have decided to stay at home during their holidays. Germany, the world champion of international tourism for decades, is waiting for better times to travel.

Even Chancellor Gerhard Schroeder prefers to remain in his native town of Hanover instead of visiting Italy, and this is not merely because of some recent nasty remarks from Prime Minister Silvio Berlusconi. It is rather that the Federal Chancellor can hardly afford to turn his back on the home front these days.

The number of voters polled who say they would vote for Herr Schroeder's governing party, SPD, if elections were held next Sunday, stands around 29 to 32 %, far behind the party in opposition, the CDU/CSU, which polls between 43 to 47 %.

The Germans have become weary of the political inertia of their country, resulting in a record level of unemployment and economic inefficiency. The vast majority of the electorate is calling for massive reforms of the system.

However, there seems to be light at the end of the tunnel. After two years of stagnation, the IWF has forecast a growth rate of 1 - 1½ % for 2004, modest as this may appear to observers abroad. Some other economists provide slightly more optimistic forecasts.

In particular, hopes are pinned on accelerated tax cuts, resulting in an average income tax reduction of 10 %. Originally, this was scheduled for 2005, but is now envisaged for January 2004. The Government wants people to be able to spend more of their money, and in doing so hope to generate impetus for economic growth. Analysts estimate that expedited tax cuts could boost GDP growth in 2004 by 0.2-0.5 of a percentage point.

Unfortunately, the tax cuts would probably push Germany's 2004 budget deficit over the euro zones limit of 3.0 % of GDP for the third year in a row. There have been critical noises from Brussels, but a fine from the EU remains rather unlikely. The IMF has welcomed Germany's planned tax reform as well as the proposed streamlining of Germany's over-generous welfare state.

After the summer respite, this country and its citizens will have to face quite a few tough challenges, in their homes as well as at their workplaces. The Bundestag in Berlin will reconvene on September 8.

Meanwhile, the key IFO business climate index was up for the third month in a row in July. The index was at 89.2 compared with 88.8 in June. Economists said that based on previous experience a three-month upturn in the IFO index meant that an economic upturn is coming. Chancellor Schroeder will be hoping they are right.