Purring economy bolsters credibility

Germany’s political leaders must be quietly sighing with relief. Had they taken over the EU presidency a year ago they would have had to turn up in Brussels with their tails between their legs.

With Germany’s economy then still stumbling along and the budget deficit over the Stability and Growth Pact ceiling for a third successive year, its policymakers would not have had the credibility to offer economic leadership that they now enjoy.

Today, Germany, the engine of the EU economy, is beginning to purr. Growth in 2006 is expected to be 2.4% and the budget deficit to drop to 2.2% this year and 1.6% in 2007.

Next year’s budget outcome will be heavily influenced by January’s 3% hike in the VAT rate, a gamble because nobody is quite sure how big a negative impact this will have on growth, inflation or consumer demand.

It has been the return of Germany’s cautious consumers to the shops which ignited this year’s revival. The VAT rise could make them so gloomy again that even the Commission’s cautious 1.2% growth forecast for 2007 proves optimistic.

Behind the recovery of 2006 lies a bounding world economy and a German corporate sector which has risen better than most to the challenge of globalisation - restructuring and recapturing the top slot in the world trade league. The German economy has been mightily assisted by rising employment and a workforce that has accepted that wage growth must be curbed in the interests of increased international competitiveness.

Sotto voce, the complaint from its EU peers is that, on this score, Germany has done too well and put too much pressure on countries such as Italy to curb labour costs. The world economy is slowing and turning points are unpredict-able. But the EU’s short-term cyclical economic outlook is, it seems, set fair.

Germany’s political leaders must be quietly sighing with relief. Had they taken over the EU presidency a year ago they would have had to turn up in Brussels with their tails between their legs.