Kohl told to bite the bullet

Even before he has a chance to put back together the weakened pieces of his coalition, Chancellor Helmut Kohl was served notice yesterday by Germany's leading economic institutes that only radical government action will give the current recovery a lasting basis. In their autumn report the institutes called on the government to brave controversy, especially in cutting social spending, if it does not want to see Germany's good economic chances spoilt in the coming years.

This admonition from the country's top research institutes echoed concerns expressed by business that the government - reelected with a wafer-thin majority - will find it hard to take unpopular decisions. A post-election report by the Institutional Investors Team of Deutsche Bank caused a furore by suggesting big clients should pull out of German shares because of the poor political prospects clouding the economic horizon.

The majority of the institutes do not go this far, in the near future at least offering a positive outlook for 1995 after the much better than expected recovery this year from recession. Thanks to continuing strong export demands, and surprisingly robust investment activity by firms, the German economy is forecast to grow by 3 per cent in 1995 after 2.5 per cent this year. One of the institutes, the neo- Keynsian DIW in Berlin, took a more sceptical view, warning that weak consumption and faltering investment would drag growth back to only 1.5 per cent in Germany next year.

But even the optimistic majority concedes that the expected good economic performance in 1995 will make only a slight dent on the high level of unemployment inherited from recession. It is forecast to fall marginally by 120,000 to 3.6 million next year.

To achieve a significant reduction in unemployment the strong growth needs to be put on a sound long-term basis, the institutes stated and that requires a number of key tasks to be fulfilled. High on the list is the curbing of public spending over many years. This places the government's finance policy before 'extremely great challenges', the institutes noted.

The introduction of a 7.5 per cent income tax surcharge in January 1995, pushing tax levels to record heights, makes an as speedy as possible reversal of the trend, vital.