German growth gives boost to single currency

Germany looks set to fulfil the most important Maastricht criteria for European monetary union, thanks to an unexpectedly strong surge in its economy.

The export-led recovery, expected to be confirmed by the publication tomorrow of the latest growth statistics, is pushing the German public deficit to within a whisker of of the 3 per cent figure laid down by Maastricht. The introduction of new accounting techniques will also shave off a decimal point or two, and the government seems confident that what little flab remains above the line can be massaged away.

Bonn's perceived failure to deliver the magic number has been one of the most serious destabilising factors in the run-up to monetary union in 1999. Conversely, a German 3.0 will be regarded by financial markets and European governments as a strong boost to EMU.

According to leaked estimates of the latest growth rate, the economy has been expanding twice as fast in the second quarter of this year as originally thought. In the light of these figures, analysts have been hurriedly upgrading their forecasts for the rest of the year. Instead of a 2 per cent growth rate for 1997, research institutes now expect the economy to expand by more than 2.5 per cent.

That coincides roughly with the government's estimate, which until a few months ago had seemed wildly optimistic. The difference in growth rate is just about enough to fill the state's coffers to the level required by Maastricht. There will still be a budget hole, but it should be small enough for a man with the creative genius of the Finance Minister, Theo Waigel, to fill.

The news gets even better next year. Helmut Kohl, the Chancellor, has told his party that the economy will be growing by 3 per cent when elections are held next September. Much depends on this prediction coming true, but most economists agree with his assessment.

The bad news, truly rotten from the electoral point of view, is that the voters are unlikely to feel the effects of the recovery. Wages are stagnant, shops are barely surviving, and dole queues are getting no shorter. There are 4.3 million Germans out of work - about 11 per cent of the working population - and very few of them expect to find a job in the near future. Those who still have a job are terrified of losing it. Shopping sprees are out.

The recovery Germans read about is taking place almost entirely within the gates of a few factories and outside the country's borders. With the once upwardly mobile Deutschmark on the slide, German exports have rarely been so cheap - in Britain and the US. To domestic consumers the triumphs of Porsche in the US are of little relevance, however. The factories are not hiring, the construction sector is bust, and the public sector is cutting back.

For all these reasons, it is hard to find a German economist who is willing to be optimistic about the country's future. Those prepared to stick their necks out in this gloom are invariably found abroad.

The leading cheerleader is the Wall Street investment house JP Morgan, which last week broke ranks with the establishment by predicting that Germany's recovery will be sustainable.

The bank commended Germany for creating a "growth-friendly environment". Great news for the government, EMU, and German share-holders, in other words, but even this up-beat forecast expects no improvement in unemployment.