European Leaders’ Softening on Austerity May Accelerate

By Patrick Donahue

Europe may accelerate a shift away from its austerity-first agenda this week as the new Italian government changes course and a German-Spanish investment pact underscores a renewed focus on combating record unemployment.

Yesterday’s swearing in of Italian Prime Minister Enrico Letta ends a political deadlock nine weeks after voters rejected the country’s budget-cutting course. German Finance Minister Wolfgang Schaeuble, a champion of austerity, will travel to Spain today to unveil a plan aimed at spurring investment in Spanish companies. Later this week, the European Central Bank may also cut interest rate at a meeting.

 

“You have to react to economic developments -- we do so in Germany,” Schaeuble told members of Chancellor Angela Merkel’s Christian Democratic Union in Berlin last week. “We are not bureaucratic; we are not stupid.”

The new Italian government’s pledges to dismantle parts of the budget-cutting project undertaken by ousted premier Mario Monti open a new front in the debate over the German-led policy of austerity to overcome the bloc’s debt crisis. As the 17- member euro area remains mired in recession, European leaders are joining global critics in urging the bloc to devote more resources to boosting economic growth.

 

Italian bonds strengthened for a fourth week last week, with 10-year yields dropping below 4 percent for the first time in almost 2 1/2 years. As the two-month political gridlock ended, speculation also about the ECB’s possible rate cut.

|Bloomberg| Fragment

 

 

 

Germany’s economic boost

According to GfK forecasts, spending of private households in Germany will increase by 1 percent in real terms in 2013. This was announced by Matthias Hartmann, CEO of GfK, at today’s press conference in Nuremberg. Private consumption is therefore making a stable contribution to the German economy.

In light of low interest rates and concern about the future of the euro, consumers are tending to make high value purchases. Moderate growth is forecast for retailers. German consumers have started 2013 in positive spirits. All indicators of the GfK Consumer Climate were on an upwards trend as the year began. Although economic development noticeably slowed down in winter 2012, for consumers the turning point has seemingly been reached. Economic expectations are currently improving. This assessment of consumers is also shared by business, as demonstrated by the Ifo Business Climate Index, which increased for the third consecutive time in January.

Buoyed by the positive situation on the labor market, German consumers are expecting their income to increase in the near future. The perceived job security is giving consumers the necessary planning security for making major purchases. At the same time, savings and loan interest rates are at a record low. This is above all benefiting the real estate sector, which is proving to be a safe haven in which consumers can invest their savings. According to an estimate from the Ifo Institute, the number of completed homes increased by around 17 percent last year. GfK data attests to an increase of around 7 percent in spending on renovation. Concern about the future of the euro is also enhancing this trend. The former German ‘fear-driven savers’ have now in part developed into ‘fear-driven consumers’.

|Fragment of International Trade News|