10 December 2003

EZA Report 573: Germany-Economy

German Agenda 2010 may offer E16bn GDP boost
The two key reform projects of the Red/Green federal government of German Chancellor Gerhard Schröder - tax and labour reform in Agenda 2010 - are increasingly likely to pass into legislation. While the risk of failure remains substantial, it is significantly lower than the 50% estimated in German media. However the influence of the opposition CDU/CSU-dominated Bundesrat upper house implies the focus will fall more heavily on business-friendly structural reforms than on fiscal stimulation. This should help investment growth while keeping the debate on structural reforms alive. Tactical considerations of both parties are being shaped by economic data and take place against a background of a strengthening recovery. Given employers’ enhanced willingness to boost employment, and hence aggregate private consumption, the reforms should make Germany less dependent on exports. Despite the strength in orders and moderately falling unemployment, the recovery in domestic demand is tentative at best. Tax cuts could become the swing factor to tip the balance towards growth, while labour market reforms could provide a similar stimulus for investment.

SummaryAsset Conclusions: Envisaged German reforms equally positive for bonds, equities, euro - but now priced in. Failure would hit consumer-related stocks.

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© Graham Bishop