Country Report Germany November 2009

Summary

The centre-right Christian Democratic Union (CDU) will lead a new coalition with the smaller liberal Free Democratic Party (FDP). Angela Merkel has retained the premiership and now dominates German politics.
The new coalition should be a solidly stable arrangement. However, more policy differences than expected emerged during talks to form a coalition. In most cases, differences were fudged. Conflicts could take place later.
Foreign matters will remain high on the political agenda during the outlook period, as challenges emanate from Russia, Iran and Afghanistan. The stability of some European economies may well cause strains in the EU.
The general government budget is expected to register deficits of 5.5-6% in the 2010-11 period, an upward revision owing to significant new tax cuts announced as part of the CDU-FDP government programme.
With interest rates in the euro area at 1%, the Economist Intelligence Unit does not foresee further reductions in rates. The monetary authorities may intensify their unorthodox policy measures if conditions do not improve.
In 2009 we expect the largest contraction of the economy since records began, with GDP falling by 4.8%, before registering modest growth in 2010-11.

After three weeks of intense talks, the conservatives and liberals announced their programme for government. The centrepiece is a commitment to cut taxes by up to €24bn annually, or just over 1% of GDP.
In a poll published after the programme was announced, 53% of respondents said that they opposed the tax cuts package, while 42% voiced support. Two-thirds said that they did not believe the cuts would ever come into effect.
Social security contributions, which are shared almost equally between employers and employees, are to be held at or close to current levels (but if they rise, employees, rather than employers, will take on any additional costs).
The effective tax burden for businesses will be reduced from 2010 by various measures. Most important is an increase in tax write-offs of interest payments.
Manufacturers' level of foreign orders (at constant prices)—a good leading indicator of export performance—continued to rise in August, and now stands 19% above the low point registered in February.
Tax liabilities associated with the passing of ownership of family companies from one generation to the next are to be reduced.
The closely watched Ifo Institute's index reached 91.9 points in October, up from 82.2 points in March 2009, its lowest-ever reading.

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22