Sunday, September 30, 2007

Ukraine holds an early parliamentary election

By Manuel Alvarez-Rivera, Puerto Rico

Ukraine, the second largest of the former Soviet republics, will hold an early parliamentary election on Sunday, September 30, 2007 to choose members of the country's unicameral Parliament, the 450-seat Supreme Council or Verkhovna Rada. Since 2006, parliamentary seats are distributed on a nationwide basis by the largest remainder method of proportional representation among parties or coalitions polling at least three percent of the vote in the entire country.

Legislative elections in Ukraine normally take place every five years, but the upcoming poll will be held nearly four years ahead of schedule, following a constitutional stalemate between the country's major political leaders: President Viktor Yushchenko and his arch-rival, Prime Minister Viktor Yanukovych, who made a political comeback in last year's parliamentary elections, after Yushchenko had defeated him in the re-run of the disputed 2004 presidential election.

From Independence to the Orange Revolution

Ukraine declared itself independent in August 1991, in the aftermath of the aborted coup in the Soviet Union. The declaration of independence was confirmed the following December by 90.3% of the voters, in a referendum held simultaneously with a presidential election won by Leonid Kravchuk, a former Communist leader. However, Kravchuk's term in office was characterized by severe economic decline and runaway inflation, while privatization of the economy moved at a snail's pace. Less than five percent of production was fully in private hands by the time a presidential election was held in June 1994, in which Kravchuk was defeated by Leonid Kuchma, a Soviet-era industrial manager and former prime minister (1992-93) who advocated closer ties with Russia. Meanwhile, the reconstituted Communist Party of Ukraine had emerged as the largest party in parliamentary elections held earlier that year.

Under Kuchma, Ukraine adopted a new constitution in 1996 that gave the president extensive powers and retained the unicameral legislature. Later that year, the hryvnia was introduced as the new currency, replacing the Ukrainian coupon (karbovanets) that had served as legal tender since 1992. However, in the 1998 parliamentary elections, carried out under a new electoral law which provided for the election of half the deputies by party-list proportional representation (with the remaining half chosen in single-member districts), the Communists were again the largest party, and relations between the president and the legislature remained tense. Although corruption represented a major problem and Ukraine's economy continued to struggle, Kuchma was re-elected in 1999, defeating Communist Party leader Petro Symonenko in an election generally regarded as less than exemplary, given the government's tight control over the media and other abuses, such as the intimidation of candidates and their supporters.

Ukraine's economy began to experience sustained growth in 2000 under a program of economic reforms initiated by Viktor Yushchenko, Kuchma's newly appointed prime minister. However, the following year Kuchma dismissed the increasingly popular Yushchenko as head of government. In the 2002 parliamentary elections, the opposition bloc Our Ukraine, led by Yushchenko, emerged as a major challenger to Kuchma's increasingly authoritarian and corrupt government, winning the largest number of votes and seats in the proportional representation ballot, ahead of the Communist Party and the Kuchma-sponsored For a United Ukraine bloc. Nonetheless, the conduct of the elections left much to be desired, and several parties - Our Ukraine among them - protested the use of bribery and intimidation by the government during the election, as well as the perceived manipulation of election results. Despite its third-place finish in the proportional vote, For a United Ukraine won the largest number of single-member seats; it became the largest parliamentary party after a number of independent deputies joined its ranks, and the government was subsequently able to secure a parliamentary majority.

President Kuchma, who appeared to be implicated in the 2000 murder of prominent journalist Georgiy Gongadze - the so-called "Kuchmagate" - chose not run for re-election in 2004. Instead, he endorsed Prime Minister Viktor Yanukovych, a former governor of the Donetsk region in eastern Ukraine and the leader of the Party of Regions. Meanwhile, Viktor Yushchenko emerged as the main opposition candidate, supported by Yulia Tymoshenko, Yuschenko's former deputy prime minister and the leader of the eponymous bloc, which had emerged as the fourth largest party in the 2002 legislative election.

The campaign was far from free and fair, despite assurances to the contrary by the authorities: Yushchenko was physically prevented from campaigning in Donetsk as well as other eastern cities, and the government mobilized its resources in favor of Yanukovych, in open violation of the law. Nationwide media in Ukraine were largely controlled by oligarchs with close links to the government, and the latter issued temnyky or guidelines to control the content of media broadcasts during the course of the election campaign. Not surprisingly, Yanukovych's coverage was overwhelmingly positive, while Yushchenko was depicted as an extremist; moreover, Yanukovych received more television coverage than all the other candidates put together in the months preceding the election. In September, Yushchenko fell seriously ill as a result of dioxin poisoning (allegedly at the behest of Ukrainian authorities), which left his face scarred. Meanwhile, Russian President Vladimir Putin openly supported Yanukovych - as did the Russian media, which campaigned strongly against Yushchenko.

A total of twenty-four candidates took part in the October 31 first round of voting, which international observers criticized as falling well short of democratic standards. According to official results released ten days later by Ukraine's Central Election Commission (CEC), Yushchenko narrowly outpolled Yanukovych by 0.6% of the vote; Oleksandr Moroz, leader of the Socialist Party of Ukraine, and Petro Symonenko of the Communist Party trailed far behind in third and fourth place, respectively. With 39.9% of the vote, Yushchenko fell short of an absolute majority, and a runoff election was held on November 21. While independent exit polls indicated Yushchenko had won the second round by a sizable majority, the CEC declared Yanukovych the election winner by a margin of just under three percentage points. However, some of the figures released by the Commission were suspect: for example, in Yanukovych's home region of Donetsk, turnout jumped dramatically from 78.1% in the October 31 vote to an extremely high 96.6% (by comparison, the nationwide voter turnout rate was reported to have increased from 74.5% in the first round to 80.4% in the runoff vote).

Russia and Belarus rushed to recognize Yanukovych's "victory," but the United States and the European Union (EU) declared the election fraudulent. Meanwhile, Yushchenko's supporters organized mass protests against the election fraud attempt, bringing together millions of citizens to Kyiv (Kiev) over the course of the following two weeks in a series of peaceful rallies that became known as the "Orange Revolution," after Yushchenko's campaign color. In early December, the Supreme Court invalidated the results of the November 21 vote and ordered a second runoff. The CEC was replaced, and Parliament - which for good measure had also declared the runoff election results to be invalid - amended the electoral law to prevent uncontrolled absentee balloting and false voting at home, both of which had been identified as election fraud tools. In the December 26 election re-run, closely monitored by Organization for Security and Co-operation in Europe (OSCE), Yushchenko won a decisive victory with 52.0% of the vote to Yanukovych's 44.2%, on a 77.2% turnout; Donetsk region reported a turnout rate of 84.2%.

While Yushchenko prevailed by a substantial majority, the outcome of the second runoff election highlighted the division between western and central Ukraine on the one hand, and eastern and southern Ukraine on the other: the former went for Yushchenko, while Yanukovych carried the latter, as illustrated by the following map (courtesy of Serhij Vasylchenko):



However, the East-West division was not a new phenomenon in Ukrainian politics. In the 1994 and 1999 presidential elections, central and western Ukraine - the latter of which had been part of Poland (or Czechoslovakia in the case of Transcarpathia) between the two world wars - voted for the candidate perceived as least close to Russia (Kravchuk in 1994, Kuchma in 1999; Serhij Vasylchenko's website has election maps for both events).

Although OSCE concluded that Ukraine had taken "a great step forward toward free and fair elections," Yanukovych challenged the validity of the results. Nonetheless, the Supreme Court rejected his appeal and Yushchenko was sworn in on January 23, 2005.

The Orange Revolution Takes Off...and Stalls

Once in office, President Yushchenko appointed a coalition cabinet composed of Our Ukraine, the Yulia Tymoshenko Bloc, the Socialist Party of Ukraine and the Union of Industrialists and Entrepreneurs, with Mrs. Tymoshenko - Yushchenko's Orange Revolution ally - as the country's first female prime minister. However, the new government ran into trouble very quickly. The Ukrainian economy, which had been growing strongly, slowed down abruptly. Rival groups emerged within the ruling alliance, and engaged in an increasingly bitter in-fighting, while President Yushchenko came across as thin-skinned when dealing with media criticism of family members and close associates. In September 2005, Yushchenko dismissed his entire cabinet - Prime Minister Tymoshenko included - accusing it of incompetence. To the dismay of many of his supporters, Yushchenko then reached an agreement with his former presidential adversary Viktor Yanukovych over the appointment of Yury Yekhanurov as prime minister.

President Yushchenko sought closer ties with the West - he had promised that Ukraine would take immediate steps to join the EU and the North Atlantic Treaty Organization (NATO) - but there was little progress in negotiations with the EU, and NATO membership remained a divisive issue in Ukraine. Meanwhile, relations with Russia deteriorated markedly. Russia regards Ukraine as part of its "natural" sphere of influence, and very much resented what it regarded as Western interference in the 2004 presidential election.

In some ways, Ukraine's situation with respect to Russia is similar to that of the Baltic republics (which also broke away from the Soviet Union in 1991), but there are important differences. Like Estonia and Latvia, Ukraine has a large ethnic Russian minority (concentrated in the eastern part of the country and the Crimean peninsula) that constitutes about one-sixth of the population. However, unlike the national languages of the Baltic countries, Ukrainian is a Slavic language closely related to Russian, and the two languages are mutually intelligible. In fact, more than a decade-and-a-half after independence, Russian remains the first language of approximately thirty percent of Ukraine's population. To be certain, the status of the Russian minority and the Russian language in Ukraine has been at times a point of contention with Russia, but there is far less animosity over either issue than in the Baltic nations, and relations between the Ukrainian and Russian ethnic communities are generally good.

Constitutional Reform and Power Struggle

During the 2004 presidential election crisis, Parliament approved constitutional reforms that shifted certain powers from the president to Parliament. Although opposition parties had defeated an earlier attempt by Kuchma's outgoing government to limit the powers of the presidency, the reforms were accepted by Yushchenko's supporters as a "grand compromise" to lower the stakes of the presidential election re-run and make Yushchenko's anticipated victory more palatable to his opponents.

Under the reforms, effective as of January 2006, the president no longer has the right to dismiss the cabinet, which is now responsible to Parliament. Meanwhile, the prime minister is appointed by the president on the recommendation of the party or parties holding a parliamentary majority, and the appointment must be confirmed by Parliament, which also appoints and dismisses cabinet ministers as proposed by the prime minister. However, the president retains the constitutional right to appoint the defense and foreign ministers, as well as the head of the security service. The president also retains the right to veto legislation, with the exception of constitutional laws, and may stop cabinet decrees, provided the decisions are endorsed by the Constitutional Court. Thus, the constitutional reforms established what political scientists would refer to as a semi-presidential form of government.

Parliament wasted no time in exercising its new powers, and on January 10 it sacked the government of Yury Yekhanurov, ahead of the March 26, 2006 legislative elections. A total of forty-five parties contested the elections, with the following results:

Party of Regions - 8,148,745 votes (32.1%), 186 seats
Bloc of Yulia Tymoshenko - 5,652,876 votes (22.3%), 129 seats
Bloc "Our Ukraine" - 3,539,140 votes (14.0%), 81 seats
Socialist Party of Ukraine - 1,444,224 votes (5.7%), 33 seats
Communist Party of Ukraine - 929,591 votes (3.7%), 21 seats
People's Opposition Bloc of Natalia Vitrenko - 743,704 votes (2.9%), no seats
Bloc of Lytvyn - 619,905 votes (2.4%), no seats
Others - 3,332,330 votes (13.1%), no seats

The introduction of a fully proportional electoral system with a nationwide three percent threshold reduced the number of parties represented in Parliament to five. Viktor Yanukovych and his Party of Regions, which ran a professional campaign advised by American political consultants, staged a major comeback and topped the poll, while the Yulia Tymoshenko Bloc tripled its share of the vote and became the largest party on the "Orange" side of the political spectrum. On the other hand, the election was a major setback for President Yushchenko: Our Ukraine had a poor third-place showing, symptomatic of the widespread disenchantment with a government that had failed to improve living standards and tackle corruption effectively. Finally, the once-powerful Communist Party was largely eclipsed by the Party of Regions, barely managing to overcome the three percent barrier.

The elections were generally regarded as free and fair. Unlike in previous elections, the government neither interfered in the election process nor attempted to control the media. The Orange Revolution may not have improved the lot of the average Ukrainian, but it paved the way for the development of a true (if by no means perfect) electoral democracy in Ukraine - in stark contrast to neighboring Belarus (which slid into outright dictatorship) and Russia (which had drifted into a distinctly authoritarian "managed democracy") - and the days of election fraud, government censorship and politically motivated murders were certainly over.

Meanwhile, the East-West political divide changed relatively little in the 2006 parliamentary elections, as shown by the following maps (kindly furnished by Serhij Vasylchenko):



The map on top, which shows the majority party in each election district, clearly indicates that the west and the center went for Our Ukraine (orange) or the Yulia Tymoshenko Bloc (yellow), while the Party of Regions (blue) prevailed in the east and south, although it scored a handful of victories outside its home base.

However, the bottom map - showing the second largest party in each district - presents an interesting picture: while Our Ukraine and the Yulia Tymoshenko Bloc were almost invariably the two largest parties in the west, in central Ukraine the Party of Regions competed with Our Ukraine and the Socialists (pink) for the second spot. More importantly, in eastern and southern Ukraine the Yulia Tymoshenko Bloc arrived second in most cases, except in Donetsk, Luhansk and Crimea (excluding Sevastopol). In the former two, the People's Opposition Bloc of Natalia Vitrenko (brown) and the Communist Party (red) competed for second place, while in the latter Our Ukraine finished second, with the Yulia Tymoshenko Bloc right behind. In all, the Yulia Tymoshenko Bloc managed to obtain a substantial number of votes throughout the entire country, with the exception of the Donets Basin.

Negotiations leading to the formation of a new government extended over the course of the following months, and by June it appeared the "Orange" parties - Yulia Tymoshenko Bloc, Our Ukraine and the Socialists - would form a coalition government headed by Mrs. Tymoshenko. However, at the last minute Socialist Party leader Oleksandr Moroz abandoned his erstwhile allies and cut a deal with the Party of Regions and the Communists in a coalition that made him speaker of Parliament and Yanukovych prime minister. In August President Yushchenko agreed to the appointment of Yanukovych as head of government; the only alternative would have been to call an early parliamentary election.

However, the 2004 constitutional amendments were highly ambiguous regarding the division of power between the president and the prime minister, and Yanukovych quickly sought to define his powers (and those of Parliament) in the broadest possible manner, to the detriment of the presidency. For example, in December 2006 Parliament sacked Foreign Minister Borys Tarasyuk - the architect of Yushchenko's pro-Western policy - but the president made it clear that it was his prerogative to remove the foreign minister since he nominated him, and he ordered Tarasyuk to continue in his job. Although the constitution does not specify how ministers appointed by the president can be dismissed, Tarasyuk was nonetheless barred from attending subsequent cabinet meetings, and in late January 2007 he tendered his resignation. Unfortunately, the amended constitution failed to provide conflict resolution mechanisms, and the result has been an intense power struggle between President Yushchenko and Prime Minister Yanukovych.

In April 2007, President Yushchenko dissolved Parliament and called an early election for May 27, after talks with the leaders of parliamentary factions failed to resolve the political crisis, which has paralyzed the government. Initially, Prime Minister Yanukovych was staunchly opposed to the early poll, but the following month he reached an agreement with Yushchenko to hold the parliamentary election on September 30. Despite the ongoing constitutional crisis, the Ukrainian economy posted strong gains in 2006, and Prime Minister Yanukovych is running on his government's economic record, while playing down his party's policy in favor of closer ties with Russia.

A total of twenty parties or blocs will take part in the election, but only four or five appear likely to secure representation in the Supreme Council: the Party of Regions, Yulia Tymoshenko Bloc, Our Ukraine-People's Self-Defense, the Communist Party and possibly the Lytvyn Bloc; the Socialist Party is widely expected to lose its parliamentary representation. Nonetheless, opinion polls suggest the election outcome will not be significantly different from last year's vote: the Party of Regions is all but certain to come in first place, followed by the Yulia Tymoshenko Bloc and Our Ukraine-People's Self-Defense; the latter two have set aside their past differences, and their combined electoral support appears to be slightly above the Party of Regions' poll numbers. As such, the result may hinge on whether or not the Communists or the Lytvyn Bloc win enough votes to overcome the three percent threshold, and it remains far from clear that the elections will put an end to the year-long, constitutional tug-of-war between Ukraine's pro-Western president and his pro-Russian prime minister.

Update

Ukraine's Central Election Commission (CEC) is publishing live 2007 election results in both Ukrainian and English.

On Monday, October 15, 2007, the CEC website reported final election results were as follows:

Party of Regions - 8,013,895 votes (34.4%), 175 seats
“Block of Yulia Tymoshenko” - 7,162,193 votes (30.7%), 156 seats
Block “Our Ukraine – Peoples’ Self-Defense” - 3,301,282 votes (14.2%), 72 seats
Communist Party of Ukraine - 1,257,291 votes (5.4%), 27 seats
“Block of Lytvyn” - 924,538 votes (4.0%), 20 seats
Socialist Party of Ukraine - 668,234 votes (2.9%), no seats
Progressive Socialist Party of Ukraine - 309,008 votes (1.3%), no seats
Others - 661,928 votes (2.8%), no seats

In addition, there were 637,185 votes (2.7%) cast against all parties. The election had a 62% voter turnout rate, down from 67.6% in 2006.

Once again, Ukraine's East-West political divide remained largely unchanged, as shown by the following 2007 election maps (courtesy of Serhij Vasylchenko):



However, the maps clearly show how the Yulia Tymoshenko Bloc outpolled Our Ukraine-People's Self Defense nearly everywhere in western and central Ukraine, with the notable exception of Transcarpathia.

Although Prime Minister Yanukovych's Party of Regions had the largest share of the vote, the pro-Western parties (Yulia Tymoshenko Bloc and Our Ukraine-People's Self Defense) won a total of 228 mandates, for an overall majority of six seats.

As noted at the beginning of this posting, Supreme Council seats are allocated by the largest remainder method of PR. Under this system, the total number of votes polled by parties entitled to participate in the distribution of seats is divided by the total number of parliamentary seats (450) to obtain an election quota (the Hare quota). Then, the number of votes polled by each qualifying party is divided by the quota, and the integer part of the division is the number of seats assigned to the party. If there remain unfilled seats, these are allocated to the parties with the largest fractions or remainders.

According to final results issued by the CEC, the five parties or blocs polling at least three percent of the vote received a seat for every 45,909 votes. The apportionment of seats by the full Hare quota allocated 448 mandates, leaving two seats to be assigned according to the largest fractions: one for Our Ukraine-People's Self Defense (on a large fraction close to the quota) and the final seat for the Party of Regions (at the expense of the Communists).

Meanwhile, the Socialist Party finished just under the three percent minimum required to obtain parliamentary representation. Had the Socialist share of the vote reached the threshold, the "Orange" parties would have fallen short of an absolute majority.

The narrow parliamentary majority secured by the Yulia Tymoshenko Bloc and Our Ukraine-People's Self Defense is too small to form a long-lasting government, and one party which might come into play is the bloc headed by former speaker Volodymyr Lytvyn, who had been a close associate of President Kuchma until he switched sides in 2004 to support Viktor Yushchenko. Lytvyn had previously indicated he might support either the pro-Western or the pro-Russian parties, in all likelihood anticipating his party would overcome the three percent threshold it narrowly missed in 2006, and hold the balance of power after the election. At it was, the Lytvyn Bloc did secure parliamentary representation this time around, but the failure of the Socialists to overcome the electoral barrier left the "Orange" parties in the majority. Nonetheless, the Lytvyn Bloc could provide the winning parties a much more comfortable majority of 46 seats.

Meanwhile, President Yushchenko has called for "co-operation" between the pro-Western parties and Yanukovych's Party of Regions, even suggesting that the latter be offered cabinet positions in an "Orange" government. Although the president is ostensibly concerned about Ukraine's national unity and stability, he is probably worried as well about giving too much power to Mrs. Tymoshenko - who is regarded as a likely rival in the 2009 presidential election, particularly after her party's strong showing in the recently held parliamentary election.

Nonetheless, following the announcement of final results on Monday, October 15, the leaders of the Yulia Tymoshenko Bloc and Our Ukraine-People's Self Defense signed an agreement to form a coalition in the newly-elected Supreme Council. On Thursday, November 29, the two parties officially established a "Coalition of Democratic Forces" parliamentary majority. The agreement, signed by all but one of their 228 deputies, paved the way for the return of Yulia Tymoshenko as prime minister, while Our Ukraine-People's Self Defense nominated the speaker of the Supreme Council.

A week after coming up one vote short of an absolute majority, Yulia Tymoshenko's appointment as head of government was finally confirmed by a parliamentary majority of one on Tuesday, December 18; the opposition parties boycotted the vote.

2 comments:

DLW said...

Most blog commentators believe the Oranges will need Lytvyn to get a significant majority. So it depends on whether the NUNS will be able to withstand the temptation to join a broad coalition...

dlw

Manuel Alvarez-Rivera said...

It's quite possible, given that the Orange parties' parliamentary majority is likely to be far too small to be viable in the long term (or even the short term for that matter). However, Lytvyn's party is a wild card.

The lingering question is whether the Orange parties will actually get an absolute majority after all. Although only six percent of the polling stations are still outstanding, the vote is fairly close, and it's not entirely unconceivable that Lytvyn may hold the balance of power by the time every ballot has been counted.

That said, what remains to be tallied includes both blue i.e. Party of Regions and orange districts. While most outstanding polling stations are in the eastern and southern regions, there's still a sizable number in areas such as Kiev. As such, I'd think the current figures shouldn't change by much - other things being equal.

Special Feature, The German Economy At A Glance

Welcome to the Global Economy Matters Blog. Below you will find the normal chronological blog posts. But first here is our Monthly Special Feature which in January 2008 focuses on Germany. Here you will find charts which provide background data on the German economy. We hope these will be of some help to the first time reader here, making it easier to contextualise, assess and get to grips with the general argument being presented on the blog. The big question which arose concerning the Germany economy in 2007 was whether or not the new found dynamism in German economic activity constituted some form of remaissance, and formed part of a global decoupling process whereby a sustainable recovery in domestic demand was taking place. Analysts on this blog never really accepted this view. The key question and central enigma associated with the German economy is really why domestic demand should have remained so congenitally weak over such a considerable period of time.

Since this phenomenon is also to be observed in the the two other societes with very high (circa 43) population median ages - Italy and Japan - we postulate that demographics and population ageing processes offer some part of the explanation here.

Basically what we can observe as societies move above the 40 median age mark are a number of stylised facts. Weakness in domestic private consumption would be one of these, absence of consumer credit driven property booms would be another, growing pressure on the national debt as the elderly dependence ratio steadily rises would be another, and growing dependence on export growth for sustaining GDP growth would be the central feature of the whole edifice.

We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the longer term growth stagnation from which Germany is suffering has its roots in the underlying demographics. Basically and in the long run (possibly with a 30 year lag) fertility does matter. Please click on thumbnails for better viewing.




What follows is a very rough and ready attempt to describe in broad brush strokes how the contemporary German economy actually works. First off, and as is well known, German society is ageing, and at the same time the German population has started declining. Not only is Germany's median age rising, the proportion of the population in the key 25-49 age group is now falling.






As can be seen from the chart this crucial age group touched its highpoint in 1997/98. This could be thought of as the moment of maximum capacity for the German economy since it includes the crucial 25 to 40 household-former, first-time-homebuyer group. In terms of credit expansion, it is this group which drives a significant part of internal demand.




The age group also includes another important group, the 35 to 50 years one. This group drives an economy in productive terms, since these are the prime age workers. If you think of a society as a 100 metres sprint athlete, then there is an age when this athlete is at the maximum of his or her running potential, an age after which each time they can only run the 100 metres more slowly.





Well a society is the same in terms of its collective economic potential, without addressing underlying issues either through fertility or immigration, it can only move forward more and more slowly. Consumption becomes flat, and GDP growth - gioven the external dependence - fragile.





Private consumption has hovered pretty close to the 60% mark for many years now, while government consumption - after moving sharply upwards as a total share in the first half of the 1970s has subsequently remained pretty constant, moving around the 19% of GDP mark. The big difference has been in the importance of fixed capital formation (GFCF) which reached from 1975 to 2000hovered around the 22 - 24% of GDP mark.





Prior to 1975 GFCF was at a much higher level, while post 2000 it has dropped substantially And So what we can see is that the year between, say, 1975 and 2000, when GFCF remaind a more or less constant share of GDP, constituted - to use the language of neo-classical economics - the constant growth period of the German domestic economy.The years prior to 1975 were the convergence, or "catch-up" years



And especially the 1960s, after Germany finally broke out of the destruction and devastation of WWII - while the years after 2000 constitute what the neo-classicists would call the "balanced growth period", although as we can see, it isn't very balanced, and there certainly isn't a steady state.







2008 Forecasts: There is a consenus at the present time that the German economy is slowing. Where there is no real consensus is over the rate at which it is slowing and where and when it will settle. It is clear that GDP growth in 2007 will be below the heady 3.1% annual rate achieved in 2006. The OECD last December revised their 2007 German forecast down to 2.6%, and their 2008 one down to 1.8%. The IMF in their October World Economic Outlook forecast growth for 2007 at 2.4%, slowing to 2% in 2008. Morgan Stanley's Elga Bartsch, while optimistic that the German economy will whether the credit crunch better than most (and here she may well be right) is somewhat more sanguine, putting 2008 growth at 1.5%. In general though I rather doubt her overview that "Germany could well be on the way to becoming the new growth locomotive in Europe." and especially her suggestion that "the phase of underperformance in terms of GDP growth, which has plagued Europe’s largest economy for years, is clearly over." Unfortunately, what we are arguing on this blog is that Germany's GDP growth rates since the mid 1990s are not some special kind of "underperformance", but what can be expected from a society with a rapidly rising median age which is increasingly dependent on exports rather than domestic consumption for growth.



The EU commission in it's November 2007 forecast was also convinced that the German economy was now on a "solid growth path", forecasting 2.5% growth for 2007 and 2.1% for 2008.

I personally will be very surprised if we see growth in the region of 2% for the German economy in 2008, and I even consider the 1.8% from the OECD and 1.5% from Morgan Stanley still on the high side given the extent of downside risk. Basically the reasonably favourable depreciation rules which currently apply to German investment have been changed as of 1 January 2008, and we might reasonably expect to see some sort of impact on investment comparable with the negative shock which hit private domestic consumption following the VAT rise on 1 Jan 2007. In addition all the indications suggest that German consumption will continue to be weak in 2008. So if consumer consumption is at best flat, governemnt consumption equally so, and investment and construction weakening, we are simply lefy with export growth, and here the outlook is definitely more negative in 2008 than it was in 2007. The Spanish economy (one important German customer) is visibly wilting by the day, as is the UK (another big customer), but it is to Eastern Europe we must look for the biggest impact on German exports of any correction in 2008. Just one data point should suffice, Germany exports roughly the same value of goods to the Czech Republic (and more to Poland) as it does to China. This means that Geramny is proportionately not that exposed to any slowdown in China, but hugely exposed to any sudden shift in growth and demand in the East of Europe.

So I would say, that on current data, 1% growth in Germany in 2008 look a reasonable estimate at this point, but that this needs to be taken to mean with considerable downside risk. Germany is now tremendously dependent on what happens elsewhere, and until what does actually happen elsewhere becomes clearer it is difficult to be more precise on Germany.

The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Germany's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Germany will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on German exports, and high oil and food prices will maintain pressure on the inflation front, at least in the first half of 2008. The ECB will probably switch stance towards rate reductions at some point, but since, as Elga Bartsch among many others so eloquently argues German internal consumption and investment are not especially dependent on credit conditions, easing from the ECB may not have as much impact as one would hope for.



Key Posts For Understanding The Present Path of the German Economy

Is The German Economy Heading For Recession in 2008?


Employment and Unemployment in Germany January 2008

Germany Economy, What Price the VAT Effect Now!

The German Economy, Employment, Export Shares and Age Structure

Structural Aspects of German Export Dependence

Does NeoClassical Steady State Growth Really Exist?