German drive for growth raises road-map mystery
Germany, the eurozone's economic bulldozer, this week reached a critical but vaguely signalled crossroads on recovery from recession based on tax cuts.
Analysts are puzzled about the economic destination and Berlin's route to reach it.
Chancellor Angela Merkel, in the driving seat and proclaiming tax cuts with deficit spending, seemed to head for a highway marked "growth now, deal with debt later."
But some analysts wonder whether the basic intention is to head for "deficit now to restructure growth later."
The difference is substantial since the first choice implies a relaxed position on rising debt in contrast to Germany's historic attitude, and quickly raised objections from bystanders, notably German President Horst Koehler.
The second choice implies acceptance that deficit spending must rise to avoid strangling a recovery but conditional on structural reforms to raise investment and efficiency.
"Merkel is now moving into the role of speculator, betting at high risk on growth as the basis for all her promises," the business daily Handelsblatt commented. "All the relief and tax cuts are nothing but a third stimulus package."
But some say that if Germany also simplifies the tax code as members of the pro-business Free Democratic Party (FDP) want, it could trigger a shift in policy.
Streamlining the tax structure and cutting taxes "does represent an interesting shift toward a bit more of a supply-side agenda," said Holger Schmieding, senior economist at Bank of America Merrill Lynch in London.
Supply-side policies focus on easing constraints on how businesses operate and people make choices, in contrast to demand-side policies which stimulate demand and consumption.
Beate Jochimsen, professor of public finance at the Free University of Berlin, said Merkel might be turning "to a certain extent" to a supply-side model "because they are trying to foster investment decisions.
"If they do it, this would be a great reform. However it's only formulated in a very vague way so nobody knows exactly what's going to happen," Jochimsen told AFP.
Gernot Nerb, chief economist at the Ifo economic research institute in Munich, was more cautious. He told AFP there was "not yet" a shift towards supply-side reforms even though "maybe this is the idea of the FDP in the long run.”
Comments