Bankers capitulate to the demands for growth

The Bundesbank's decision yesterday to cut interest rates by half a percentage point is capitulation in the face of the clamouring from politicians and businesses.

The move is aimed to kick-start the locomotive of Europe's economy, which seems in danger of running into the buffers. Statistics released over the past week show that only the ranks of the unemployed are growing in Germany as the economy dips into recession. Although growth is expected to resume in the second half of next year, the government is bracing itself for the loss of 300,000 jobs in the interim, raising the number of jobless to nearly 4 million.

The Federal Statistics Office reported last week that GDP was unchanged in the third quarter from the previous three months and rose a weak 1.5 percent from a year earlier - well below some forecasts of 1.9 percent.

The Berlin-based German Institute for Economic Research predicted a slight decline in the fourth quarter of this year.

The government can do little to heed demands for increased spending to boost growth. The budget deficit is already perilously close to the 3 per cent of GDP that the Maastricht Treaty has prescribed for countries wanting to participate in European monetary union. So far, Germany has played the role of the disciplinarian in European fiscal policy; it cannot therefore bust the limits it has set for other member states.

Raising more taxes also appears to be impossible. Germans are already paying more money than their European counterparts, and the so-called "solidarity surcharge" - an extra 1.5 per cent on income tax to help rebuild eastern Germany - is one of the culprits held responsible for throttling the economy.

Other scapegoats are the abolition of tax-breaks for home builders at the end of last year, which has produced a slump in the construction sector, and the mighty mark. Since March the national currency has been rising against the dollar, making German exports more expensive, which in turn has undermined domestic confidence and forced industry to postpone capital projects.

While there is no end in sight to the mark's triumphant march, the government is hoping that industry will eventually be able to adapt by trimming production costs.

But recently, industry has started employing a new tactic: exporting jobs instead of goods to countries where workers come cheap, notably Britain. The last pay round for the engineering and chemical sectors resulted in wage deals valued at between 3.6 and 4 per cent, far above annual inflation of under 2 per cent.

The rising trend of jobs for export has alarmed the trade unions, which have proposed an "Alliance for Jobs" between the workers, the employers and the government. The pact, calling for modest pay rises and flexibility on working hours in exchange for a pledge to create 300,000 jobs over the next three years, was put forward by IG Metall, the country's most powerful union.

The government has shown mild interest, but employers are holding out for greater concessions from the workers.