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Germany to continue subsidizing poorer east

Subsidies for former communist east Germany will continue past their 2009 expiration date, the German government announced on Wednesday amid disagreements about how large the payments should be.

Published: 14 May 2008 19:10 CEST

Germany to continue subsidizing poorer east

Work on a road between west and east in 2007. Photo: DPA

Continuing the payments is “good news” despite the possibility they will be shrunk, said Wolfgang Tiefensee, who’s cabinet portfolio is responsible for Germany’s eastern federal states. Tiefensee said the government would be advised on how best to change the payments, currently worth about €600 million ($928 million) per year.

A decision is expected by the end of the year. The subsidies aimed to help get the former communist east back on track was last set to expire in 2006 but was extended back then.

“A break in 2009 would be a difficult blow for the new states,” Tiefensee said, referring to the five federal states in the former East that joined the Federal Republic of Germany in 1990.

Economically depressed after more than 40 years under Communist rule, eastern Germany still suffers from higher unemployment and a weaker economy than the rest of the country.

Tiefensee declined to comment on a statement by a government spokesman that the subsidy could vary from region to region in the east in the future.

Political leaders in the east are pushing for the subsidy to remain at the same level – with no regional variations – through 2013.

ddp/dpa

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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