Expert View: Germany's angst is grist to Britain's schadenfreude

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There are few things in which Britain runs a trade surplus with Germany. One of them is words. Still, a few German words have gained popularity in the English-speaking world. These include "angst" (anguish) and "schadenfreude" (malicious enjoyment of the misfortunes of others).

There are few things in which Britain runs a trade surplus with Germany. One of them is words. Still, a few German words have gained popularity in the English-speaking world. These include "angst" (anguish) and "schadenfreude" (malicious enjoyment of the misfortunes of others).

This thought is prompted by the gloomy mood that has descended on Germany. Although this is being overdone, it will have the welcome side-effect of pushing back the evil day when the European Central Bank has to raise interest rates.

The schadenfreude at German angst is prevalent among Eurosceptic critics in the Anglo-Saxon world. They will no doubt remember allegations that the Bundesbank led the resistance to pressure from the ECB's president, Jean-Claude Trichet, for an interest rate cut back in April - and argue that Germany, close to the bottom of the eurozone growth league, is now suffering the consequences. Indeed, the Bundesbank conceded last week that "it is not certain if the current speed of expansion can be maintained".

At first sight, the current gloom looks a bit odd: Germany recorded GDP growth of 0.5 per cent in 2004, the fastest rate for three years. But the detail is less reassuring. As the Bundesbank has noted, Germany's "strong dependence on foreign trade is the Achilles' Heel of the economic recovery". The fear is that slower global growth, which could intensify if oil prices continue to rise, will threaten Germany's export growth.

Meanwhile, domestic demand has not yet gained momentum. Although Chancellor Schröder may be right to argue that the impact of higher oil prices shouldn't be overdramatised, German consumers have found plenty of other things to worry about.

Unemployment remains stubbornly high and wage growth subdued as German companies strive to remain competitive.

Meanwhile, the public are suffering from "reform-itis", disturbed by Mr Schröder's attempts to push through labour market, pension and healthcare reforms. Street protests continue.

Worryingly, while it is true that some other parts of the eurozone are doing rather better than Germany, the ECB will also recognise that some are doing worse. If we add the other principal laggards, Italy and the Netherlands, to Germany, that's 54 per cent of the eurozone economy accounted for.

Although higher oil prices have led the ECB to concede that headline inflation will stay above its sub-2 per cent target until next year, its rhetoric has served to dampen expectations that it might raise rates before the year end.

The ECB, observing that much of this year's inflation overshoot reflects higher oil and administered prices, is nevertheless keen to point out that it is watching for second-round effects that would embed this overshoot into core inflation. The current Germanic-led gloom suggests that these effects, whether on wages or more generally on inflation expectations, will be muted. Eurozone inflation could fall to 1.5 per cent in 2005.

The likelihood that the ECB will keep its official rate at 2 per cent well into next year is good news for growth. But Germany's dependence on exports leaves it at the mercy of external events.

I suspect that the coming months are more likely to see pleasant surprises on growth. The financial markets may be exaggerating the influence of oil prices, which are already unsustainably high.

Such a rebound in global growth would allow Germany to look forward to a spell of non-inflationary growth. Although hardly another wirtschaftswunder (economic miracle), at least the foreign schadenfreude at its current angst would subside...

Mark Cliffe is chief economist at ING Financial Markets.

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