Merkel Economy Scorecard Shows Steinbrueck Struggle

German economic figures show the uphill struggle Peer Steinbrueck faces to unseat Chancellor Angela Merkel in Sept. 22 elections.

Since Merkel succeeded Gerhard Schroeder in 2005, unemployment has dropped to near a post-reunification low, the budget deficit has been virtually eliminated and workers have more money in their pockets. Investors are accepting negative real returns to lend money to the federal government.

All that is serving Merkel’s bid for a third term. Her Christian Democratic Union bloc leads Steinbrueck’s Social Democrats by about 17 points in the polls. Even after eight years of her rule and her decision to bail out struggling euro nations to keep the 17-nation currency union intact, Germans see little need for a new leader, says Manfred Guellner, director of the Berlin-based pollster Forsa.

“For the man on the street there’s every reason to feel good and that of course works always to the benefit of the incumbent,” Commerzbank AG chief economist Joerg Kraemer said by telephone. “Real wages are rising and have unlocked consumer spending.”

Germany’s 10-year government bond yield will be 1.76 percent by the last quarter of this year from 3.31 percent in 2005 and 3.38 percent in 2009, according to the weighted average of 24 forecasts compiled by Bloomberg. The 10-year note now yields about 1.8 percent. Inflation will remain below 2 percent through 2014, according to the median of 84 estimates collected by Bloomberg.

Shrinking Deficit

Declining borrowing costs, along with spending curbs, have helped Merkel shrink the budget deficit. The shortfall exceeded the European Union ceiling in 2005 when it stood at 3.3 percent of gross domestic product. It fell to 3.1 percent in 2009, even amid an economic contraction. It’s forecast to drop to 0.2 percent this year according to the median of 32 predictions.

“The government has overachieved on some key fiscal targets,” Fitch Ratings said Aug. 7 when it affirmed Germany’s rating at AAA with a stable outlook and said the country’s debt as a percentage of the economy has peaked. “Germany has all the ingredients of a declining public debt path.”

The country’s unemployment rate will fall to 6.9 percent this year compared with 8.1 percent in 2009, when Merkel was in a so-called grand coalition with the Social Democrats, according to Bloomberg-compiled forecasts. It was 11.7 percent the year she took over from Schroeder.

Merkel’s decision in 2009 to extend labor-cost subsidies to businesses hit by collapsing orders allowed companies to hold on to skilled workers and supported a recovery from the deepest slump since World War II.

DAX Gains

Germany’s benchmark DAX index returned more than 60 percent since the end of Schroeder’s rule, compared with losses for France’s CAC 40 and for Italy’s FTSE MIB gauge.

Net wages grew 3.6 percent year-on-year on average per quarter during Merkel’s current term, compared with 0.3 percent during Schroeder’s final three years.

Hit by a two-year recession in the euro region that curbed its exports, Germany’s economy will expand 0.3 percent this year, the Bundesbank said June 7. Germany will grow 1.5 percent in 2014, in line with its potential, the central bank said.

“The economy of Germany is dependent on exports and data we’ve got from its key markets suggested the country is doing fine in terms of growth,” said Soeren Moerch, the head of fixed-income trading at Danske Bank A/S in Copenhagen. “If data on growth and sentiment maintains its momentum, Merkel will probably have a good chance of winning the election.”

Rising Confidence

German 10-year bonds fell today after the ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 42 this month, the highest level since March. The yield rose 8 basis points to 1.78 percent at 1:35 p.m. in Berlin.

Six weeks before the election, support for Merkel’s Christian Union bloc fell one point to 40 percent, according to a weekly Forsa poll for Stern magazine and RTL television. Backing for the SPD rose a percentage point to 23 percent, with its Green party ally also up a point at 14 percent. Merkel’s Free Democratic Party coalition partner held at 5 percent while the Left Party dropped one point to 7 percent.

The SPD’s election manifesto calls for a “new social balance” and says it’s Merkel’s fault that the lesser qualified face growing risks of poverty. Steinbrueck said in an Aug. 8 speech in Hamburg that he would act quickly to implement a statutory minimum wage and put a brake on labor leasing.

The SPD also aims to raise the top tax rate to 49 percent from 42 percent progressively from 64,000 euros ($85.357) to 100,000 euros, whereby those earning 100,000 euros or more per year would pay 49 percent income tax.

Tax Plans

Merkel’s Christian Union bloc has rejected tax increases and vowed instead to reduce the effects of “bracket creep” that occurs when wage gains subject workers to higher tax rates. It would also leave it to collective bargaining partners to set minimum wages in their respective sectors and plans to reduce government debt gradually to 60 percent of GDP from around 82 percent last year.

Whereas former SPD chancellor Helmut Schmidt was an economic expert and Schroeder had the clout of an economic “man of action,” voters see Steinbrueck as a “financial technocrat,” said Guellner.

“There is no appetite for a change in government because there is a lack of faith in the SPD’s abilities,” Guellner said Aug. 9 by telephone. “Steinbrueck isn’t seen as somebody who could do the job any better than the incumbent chancellor.”

Before it's here, it's on the Bloomberg Terminal.