Monday, September 28, 2009

Germany's Economic Prospects Brighten

The "grand coalution" between Christian Democratic CDU/CSU led by Angela Merkel and the Social Democratic SPD in Germany will now end, and be replaced with a pure centre-right coalition consisting of the CDU/CSU and the market liberal (moderate libertarian) FDP. The FDP had their best result ever with 14.6% of the vote.

As a result, Germany will now pursue more market oriented policies, including deregulation and tax cuts, something which will improve the German economy's prospects.

This would have happened 4 years ago if Angela Merkel in her first campaign hadn't pledged to raise the Value Added Tax (VAT), something which was very unpopular, and made many voters go over to the SPD. The SPD entered into a "grand coalition" with the CDU/CSU, only to agree to the VAT increase they campaigned against. For this they were justifiably punished by the voters with the by far lowest SPD result ever (or at least since World War II) of only 23%, down a full 11 percentage points from 2005.

The VAT increase not only damaged the German economy by postponing the arrival of a centre-right government by 4 years, but also by increasing Germany's export dependence, something which made Germany suffer greater declines in output than even many countries with housing bubbles, like the U.S. and Spain.


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