Germany, the third largest economy in the world, is expected to see a bigger growth in 2006 with some positive signs emerging after a few sluggish years.

However, doubts still remain whether "the engine of Europe" could see a sound and sustainable growth in the coming years, as problematic factors continue to exist and reforms by Germany's new government are in doubt.

FLICKERS OF HOPE

As a year of political haggling finally comes to an end, indicators are beginning to show that the country's economy is recovering, at least for the time being.

A monthly survey by the Mannheim-based ZEW economic research institute showed, that in Germany, the investor sentiment surged by 22.9 points to plus 61.6 points in December, the highest level since February 2004.

The ZEW said the widely watched confidence indicator is far above its historical average of 34.5 points.

"An important contributor to optimism is German companies' increased investment confidence which is reflected, among other things, in the increasing domestic order intake reported by suppliers of investment goods," it said.

The Nuremberg-based GfK market-research group said in a recent report that consumer confidence in Germany rose to a five-month high in October. Another research group, the Ifo institute, found that business confidence reached the highest in five years.

Adding to these hopes is the depreciating euro that makes German exports more competitive.

With the euro's 13 percent decline against the U.S. dollar thisyear, prospects for exports, which is the main growth driver, appear promising for the next six months, analysts say.

The Federal Statistics Office said German exports, valued at 68.7 billion euros (81.27 billion US dollars) in October, increased 7.2 percent from a year ago, although this figure went down by a seasonally-adjusted 0.6 percent from September.

Forecasters believe Germany's economy, which stayed almost stagnant in 2005, will be driven by more exports and accelerate in 2006.

Kiel Institute for World Economics, a leading economic institution in Germany, said in a report in September that the German economy has recovered from the cyclical weakness that had prevailed since the spring of 2004.

In its biannual report released at the end of November, the Organization for Economic Cooperation and Development (OECD) forecast that Germany's growth, with an anticipated rate of 1.1 percent in 2005, will reach 1.8 percent in 2006.

REFORMS DOUBTED

However, the renascent recovery could well be nipped in the budby sweeping economic reforms by the new coalition government, particularly an increase in value-added-tax (VAT), analysts say.

Under the new government's plan VAT will rise by 3 percent starting from 2007. This has drawn bitter criticism all the way since the election campaign.

Although the unemployment rate fell to a 10-month low of 11.5 percent in November, an army of 4.75 million people remain out of job and consumers remain reluctant to spend.

To make it worse, the government is raising VAT, which analysts say will hurt the already weak domestic demand, the main source toa further economic growth considering Germany's already high export growth.

Wolfgang Franz, president of the ZEW, said "the unclear direction of economic policy and in particular the planned rise of the VAT are undermining the confidence of uncertain consumers."

Gustav A. Horn, head of the trade union-linked Institute for Macro-Economic Research (IMK), recently told the Sueddeutsche Zeitung paper that every percentage point hike in VAT led to a 0.2 percentage point fall in GDP growth.

Therefore the new government's VAT increase could slash 0.6 percent off growth in 2007, he said.

Still, the new German Chancellor Angela Merkel defended her economic program as a necessary part of a move to bring Germany's public deficit back within the EU ceiling by 2007, 3 percent of GDP, after having breached the Germany-initiated Stability and Growth Pact for three years in a row.

Meanwhile, the government also expected household consumption to pick up next year as consumers would bring forward planned purchases ahead of the rise in VAT in 2007.

Among other economic reforms, Germany is bringing the tax rate to 19 percent while the top income tax rate is to go up to 45 percent from the present 42 percent.

Analysts fear the abrupt tax raise could drive Germany's moneybags abroad - along with their investment.

It is also feared that the tax reform could make it tough for the coalition to achieve its aim of cutting the double-digit unemployment rate.

"This is no miracle solution for joblessness," Bert Ruerup, thehead of the government's "wise men" panel of independent economic advisers told Focus magazine.

Kiel Institute for World Economics said in a recent report that from the perspective of the business sector, the cut in the burden caused by reduced unemployment insurance contributions will be offset by the increased burden created by a rise in value-added tax.

The net effect on employment will, thus, be minor, it concluded.

UNIFICATION COST

Another chronic pain in Germany's ailing economy is the shadow cast by the unification of the country in 1990.

East Germany, which was once a country, lost almost all its industries by unification and the price has proved to be much higher than the government might have expected.

The rebuilding of East Germany has as so far cost an estimated 1.25 trillion euros (1,550 billion US dollars). And around 90 billion euros (about 108 billion US dollars), 4.6 percent of the German GDP in 2004, are transferred from the west to the east each year.

This generous development aid is set to continue until 2020 during which each resident in Germany has to pay solidarity taxes, about 5.5 percent of their income.

Despite the unremitting capital transfusion, the economy in the east remains stagnant with buildings empty and the regional unemployment rate somewhere as high as nearly 20 percent.

So perhaps unsurprisingly, a survey earlier this year showed nearly a quarter of western Germans and 12 percent of easterners want the Berlin Wall back -- more than 15 years after the fall of the barrier that split Germany during the Cold War.

The survey, launched by Berlin's Free University and pollsters Forsa, reflected die-hard animosities over high reunification costs that significantly contributed to Germany's deficit, lowered standards of living in the west, but failed to prop up the depressed eastern region.

In a sense, a "grand coalition" seems to be in the right position to push forward bolder policies needed for a country that is more eager than ever to see the light at the end of the tunnel, said analysts.

Source: Xinhua