Page last updated at 17:23 GMT, Friday, 12 December 2008

Steinbrueck 'shouldn't scare UK'

By Tristana Moore
BBC News, Berlin

Peer Steinbrueck
Peer Steinbrueck has sparked a diplomatic row over his comments
German Finance Minister Peer Steinbrueck has become the new "bad guy" in Europe.

In an interview with Newsweek magazine, Mr Steinbrueck ruffled many feathers after he criticised the UK government's economic recovery plan - in particular the cut in VAT from 17.5% to 15%.

Mr Steinbrueck said the UK government's switch to a "crass Keynesianism" to try to spend its way out of the economic crisis after years of preaching fiscal rectitude was "breathtaking".

The growing diplomatic row between Britain and Germany has been closely monitored by the German media.

The Sueddeutsche newspaper concluded that Mr Steinbrueck was right to question the introduction of tax cuts, but the paper warned that the German finance minister should tread carefully and "not scare off the partners whom he needs".

'Cooling-off'

According to the Spiegel newspaper, the reaction in Downing Street to Mr Steinbrueck's comments was symptomatic of a "cooling-off" in Anglo-German relations, following a mini-European summit in London on Monday, which German Chancellor Angela Merkel did not attend.

It's not the first time Mr Steinbrueck has put his foot in it.

A minister who is not afraid to speak his mind, he's renowned for his "undiplomatic language" here in Germany.

In September, Mr Steinbrueck said bluntly that the US and Britain were responsible for the current financial crisis.

Mr Steinbrueck said the "insane drive for higher and higher profits" was partly to blame for the crisis and he warned that the US would "lose its status as the superpower of the global financial system."


Germany's budget deficit looks worse every day and Mr Steinbrueck should focus on dealing with his own federal budget
Otto Fricke
Free Democratic Party

Opposition politicians in Germany have launched a blistering attack on Mr Steinbrueck for his outspoken comments.

"Peer Steinbrueck is a bit like a bull in a china shop," said Otto Fricke, the chairman of the Bundestag's budget committee and an MP for the opposition Free Democratic Party.

"The Germans shouldn't be telling the British what to do, because quite simply, we don't want the British and French telling us what we have to do.

"Germany's budget deficit looks worse every day and Mr Steinbrueck should focus on dealing with his own federal budget.

"Our deficit could reach 30bn euros (£26.9bn) in 2009 and that is a serious matter," Mr Fricke said.

'No tax cuts'

The British government has blamed German "internal politics" for Mr Steinbrueck's remarks, saying the country faces a general election next year.

But the picture is more complex than that.

Mr Steinbrueck is a Social Democrat and as the finance minister, he is a member of Chancellor Merkel's left-right coalition government.

Mrs Merkel, a Christian Democrat (CDU), has herself ruled out any tax cuts, at least until after next year's election.

Although Mr Steinbrueck and Mrs Merkel belong to different parties, on fiscal policy, there seems to be consensus, at least for the time being.

GERMANY vs. UK
Stimulus plans
UK: £20bn (22.4bn euros), amounts to 1.7% of GDP
Germany: 31bn euros, 1.3% of GDP
GDP per capita (2007)
UK: $44,696
Germany: $40,078
Public debt
UK: 43% of GDP
Germany: 64% of GDP
Central bank interest rates
UK: 2%
Germany: 2.5%

However, members of the Christian Social Union (CSU), the sister party to the CDU, have been calling for tax cuts, and Mrs Merkel has been coming under increasing pressure to review her policies.

Michael Glos, the economy minister, said Germany should spend a further 25bn euros (£22.4bn)on tax relief next year to stimulate the economy.

"A tax cut for average earners ahead of the election would send the right message…People who work hard to advance the gross national product should get more from the fruits of their labour," Mr Glos said provocatively.

Germany is now officially in recession and the country's government recently announced a 50bn euro (£44.8bn) fiscal stimulus package aimed at shoring up the economy.

But many economists have derided the package as "a cosmetic measure".

But who agrees with Mr Steinbrueck's charge that cutting VAT is a worse-than-useless way of tackling the recession?

Gustav Horn, the director of the Macroeconomic Policy Institute in Duesseldorf, said: "Peer Steinbrueck has criticised the British government because he doesn't want to cut income tax, or VAT, in Germany.

"Mr Steinbrueck believes that these measures cannot effectively stimulate the economy, and he is right.

"There is a sense here in Germany that Britain is partly to blame for the financial crisis because the British government did not listen to the German government back in 2007, at the G8 summit in Heiligendamm.

"That's when Germany suggested introducing stricter regulations of the financial markets.

Peer Steinbrueck and Angela Merkel
Mr Steinbrueck and Mrs Merkel have similar views about fiscal policy

"But we need to look ahead now and the German government should announce another fiscal stimulus package, worth up to 50bn Euros, which would amount to 2% of GDP.

"If the German economy shrinks by 2% next year, this would be the worst recession since after the Second World War.

If we want to avoid high unemployment, we have to kick-start the economy," Mr Horn urged.

Lay-offs

The financial crisis is dominating the headlines in Germany.

The country's export-driven economy is extremely vulnerable to the global slowdown.

Major German carmakers, like BMW and Volkswagen, have announced that they are scaling back production and other companies are starting to lay off workers.

Germans are slowly realising that they are in no ordinary recession, and if anything, it's going to get worse next year.

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