Merkel’s Next Challenge – Germany’s Rising Unemployment

First off, congratulations to Angela Merkel and her Christian Democrat party who managed to retain the balance of power in the recent elections in Germany. Merkel ran on the strength of her stewardship of the economy, claiming credit for leading Germany – the Eurozone’s largest economy – to an early emergence from the global recession.

But now for the bad news. Many economists believe that further positive results could be on hold for awhile with unemployment being the most likely thorn in Merkel’s side. Some projections suggest that by the end of next year, unemployment will jump from the current rate of roughly 8 percent, to somewhere north of 10 percent; and if September’s loss of another 10,000 jobs is any indication, this estimate could be right on the money.

Nevertheless, you have to admit that Chancellor Merkel has – so far – exhibited a rather deft sense of timing. Her government committed over 85 billion euros ($124 billion) to stimulus spending including more than 6 billion euros ($8.7 billion) to a “cash for clunkers” scheme that set the pattern for other countries including the US and Great Britain. While the long-term value of such schemes may be debatable, there is no question that the program – for the time-being at least – saved thousands of jobs in Germany’s auto industry and helped many people purchase new cars. The boost this gave to the economy was significant and was realized just months before the election. See what I mean by good timing?

While campaigning on the strength of these results, Merkel pledged that if elected, the government would introduce a series of broad-based tax cuts for both individuals and businesses – always a popular notion for most voters. However, by playing the tax-cut card, Merkel pretty much ensured that the coalition she had established with the Democrat Party would not be repeated for a second term as tax cuts are the last thing the left-leaning Democrat Party could support. No matter – in yet another display of good timing, Merkel announced that if elected, she would form a coalition with the Free Democrats – a party more aligned on the right and openly supportive of business.

So – election won and mission accomplished; but the next few months will prove critical. The stimulus money has been spent but unemployment continues to rise, and now that the effect of the spending has all but evaporated, analysts warn that unemployment could actually accelerate. We will also learn very soon if Germany’s growth over the past two quarters is real and sustainable or just the product of government spending.

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