Angela Merkel meets Bush -- Good for euro funds

January 19, 2006

On January 13, newly elected German Chancellor Angela Merkel met President Bush. She showed a much more cooperative attitude than her predecessor, Gerhard Schroeder, who criticized the U.S. invasion of Iraq. She agreed that a tough stance needs to be taken with Iran on the uranium enrichment issue, and she reiterated Germany’s commitment to free trade, specifically the Doha round of talks.

What Angela Merkel's visit means:
Germany's economy, at $2.8 trillion GDP, is Europe’s largest and the fifth largest in the world. However, it's growth has slowed to less than 1% per year. There are several reasons:

• Modernization of Eastern Germany, which costs $70 billion per year.
• High unemployment (11.5%) and an aging population (20% age 65+) means Germany is using more Social Security than it is taking in via payroll taxes.
• Unemployment is caused by laws which make it difficult to lay off workers and lower wages - meaning companies can’t afford to hire more people and get rid of the slackers.
• This is especially true for full time jobs, and for professional occupations such as architects, lawyers, and engineers.
• The uncertainty caused by high unemployment means that export growth does not translate into domestic spending. Both businesses and people tend to save for the rainy day rather than boost the economy by spending.
• They have a budget deficit above the 3% of GDP mandated by the EU, which they must lower by 2007 or risk facing penalties.
  

Chancellor Merkel won the election by promising reform, but she will need to move cautiously to keep the other members of the coalition on board. She also needs to move cautiously to make friends with a U.S. administration that has many critics among the people she represents.

Action steps:
Although you should definitely have European, including German, funds in your portfolio, don’t expect this area to provide a lot of growth in the near future.

Source: CIA Factbook, IMF Article IV Review of Germany, White House Press Release