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ECONOMY

Steinbrück warns against ‘growth bubble’

German Finance Minister Peer Steinbrück has warned that cutting interest rates too low in an effort to counter the global recession could create a what he called dangerous "growth bubble."

Steinbrück warns against 'growth bubble'
Photo: DPA

In a recent interview with the AFP news agency and fresh from his broadside against the British government’s response to the economic crisis, Steinbrück said there was a danger of repeating the dangers of the past.

“On the one hand we need to boost the economy, on the other hand we must make sure that a policy of cheap money does not lead to a new growth bubble founded on credit, as happened after September 11, 2001,” Steinbrück said. “It is therefore important that the focus, at least in Germany, be on sustainable investments in infrastructure and less on consumer spending financed by debt,” he said.

“This is also an argument against hasty tax cuts,” he said. After the 9/11 attacks on the United States and the bursting of the tech bubble, central banks slashed interest rates in an effort to boost growth, allowing consumers to take on huge debts.

This is blamed for contributing to 2008’s credit crisis and the ensuing sharp slowdown worldwide. Central banks have now again reduced borrowing costs, this time even more drastically.

In Germany, where interest rates are set by the European Central Bank as a member of the group of countries using the euro, Chancellor Angela Merkel’s government unveiled a package of measures in November to boost growth. But with Europe’s biggest economy already in recession and facing its worst post-war slowdown, Berlin has been under pressure from all sides to give the economy a much more powerful shot in the arm.

Germany’s ruling coalition – Merkel’s CDU/CSU conservatives and the centre-left Social Democrats, of which Steinbrück is a leading member – are to chew over what else they could do at a meeting on January 5. But in the interview with AFP, Steinmeier again made clear that any new rescue package would not see Germany abandon its cherished budgetary discipline by slashing taxes and ramping up the national debt.

“What we do must be intelligent, be fair to future generations and reap future benefits,” he said. “Making temporary cuts in value added tax (VAT), for example, fulfil none of these criteria.” Merkel and Steinbrück say the first package is worth over €30 billion ($40 billion) but critics accuse them of exaggerating their efforts and say it represents only €12 billion worth of new spending.

Steinbrück said earlier this week that the second package would include steps to help the auto industry and remove hurdles to ensure that infrastructure projects were not held up by red tape. He told the daily Passauer Neue Presse that cutting people’s health insurance contributions would be much more effective in putting cash in consumers’ pockets than reducing taxes.

Germany’s government has angrily rejected calls from economists, politicians from all parties and even from other countries that it is not doing enough to boost its economy, the world’s third biggest. Steinbrück went as far as to dub the British government’s use of heavy borrowing to boost its economy as “breathtaking” and “crass Keynesianism,” referring to 20th century British economist John Maynard Keynes who advocated governments should spend their way out of recession.

He also told AFP that he was confident that once he takes office as US president in January, Barack Obama would press ahead with reforms of international financial system as agreed by Group of Seven major economies.

“I am certain that Barack Obama will seize the initiatives that we have taken at G7 level and press ahead with them with his government,” he said. “Seldom was the chance so good to transform the lessons from such a difficult crisis into concrete political action,” he said.

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ECONOMY

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

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

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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