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Schroeder win disappoints markets
FRANKFURT, Germany (CNN) -- The re-election of German Chancellor Gerhard Schroeder in Sunday's national vote will do little to ease concerns over the health of Europe's biggest economy and calm financial markets, analysts say. While Schroeder's Social Democrats -- along with the Greens -- managed to secure a second term in office, the narrow victory means the government is unlikely to introduce any reforms to restart Germany's struggling economy. "The results was not much of a surprise," John Butler, an analyst at Dresdner Klienwort Wasserstein, told CNN. "They [Social Democratic-Greens] are not going to enact much and that is going to disappoint markets." Deregulation of the labour market is "the key issues" facing the country, Butler said, "But sadly that is going to be very difficult to do." European markets fell to five-year lows on Monday, with Frankfurt's electronically traded Xetra Dax -- Germany's main index -- losing almost five percent in late afternoon trading. The global market meltdown has sent the Dax down more than 40 percent this year alone, making it the worst performer in Europe.
Official results showed the ruling Social Democrat-Green coalition had a combined 47.1 percent of the vote, giving the parities 306 seats in the new 603-seat parliament. The Christian Democrats and Free Democrats polled 45.9 percent of the vote, giving them 295 seats. (Full story) Investment bank Bear Stearns said the re-election of Schroeder "is a bad result for markets" because it leaves the government without a strong mandate to pursue change.
"Any prospect of continuing political risks and uncertainty will be relatively negative news for German equities." Faced with weak economic growth and high unemployment, the Schroeder government has been under pressure to overhaul labour laws, which make it costly for employers to hire new workers, and lower social security payments to give employees more take-home money. The German economy, which slipped into recession in the middle of last year, has been hard hit by bursting of the technology bubble, the global economic slowdown and financial market volatility. Weak exports, falling prices and rising unemployment limited Germany's economic expansion to just 0.3 percent the second quarter. Forecasts call for gross domestic product to grow by between 0.5 and 0.75 percent this year and by 2.0 to 2.5 percent in 2003. Business and consumer confidence has deteriorated, and high-profile companies -- like media giant Kirch, construction group Philipp Holzmann -- have filed for insolvency. Germany's budget deficit is expected to jump to 3.1 percent of gross domestic product this year -- breaking the limit set by the European Union's Stability and Growth Pact. Schroeder came to power on a pledge to reduce unemployment to 3.5 million people. But with unemployment now running just above four million, and a jobless rate at a high of 9.6 percent, Schroeder quickly recanted on that promise prior to this campaign. Schroeder's main opponent in Sunday's election -- Edmund Stoiber, the premier of Bavaria state and the head of the conservative Christian Democratic Union -- had promised during the campaign to cut unemployment to 3 million. Both the Schroeder and Stoiber had promised tax cuts to help jump-start the economy. But with the Greens now having a voice in the government, there could be internal conflict over what changes should be made. Also, EU members are restrained by many of the rules for membership in the 15-nation group. "Fiscal policy is wrapped up in the Stability Pact. And, in Germany's case, this means there is not policy flexibility at all given that the deficit is running over three percent of GDP," Bear Stearns said in a note to investors. Some analysts believe Germany has also been restrained by the European Central Bank, which sets interest rates in the 12-nation eurozone. Many have argued that Germany's key lending rate should be at least one percentage point lower the ECB current rate of 3.25 percent -- where it has stood since last November. "Perhaps, in this case, one policy does not fit all," said Butler of Dresdner Klienwort Wasserstein. The first glimpse of what to expect after the election will come on Wednesday when the influential and closely watched Ifo economic institute releases its monthly survey of German business confidence. If it shows sentiment worsening, which it has for the last three consecutive months, that would indicate companies are still hesitant to invest money and would point to more sluggish growth for the economy.
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