6 December 2002, 12:03  Poehl Sees Similarities Between Germany Now, Japan 10 Years Ago

/www.bloomberg.com/ By Catherine Hickley
Frankfurt, Dec. 6 (Bloomberg) -- Karl Otto Poehl, a former president of the Bundesbank, said Germany is now in a similar state to Japan 10 years ago, when the world's second-biggest economy entered a slump it is still struggling to overcome.
Parallels with Japan include stock market losses, banks' reluctance to lend, the central bank's powerlessness to spur growth, an aging population and leaders who have neglected to cut welfare and ease labor laws, Poehl said in an interview.
``I hope we won't have a similar long period of stagnation,'' said Poehl, whose 11-year term as Bundesbank president ended in 1991, when he resigned after disagreeing with then chancellor Helmut Kohl over the deutsche mark's introduction into East Germany. ``That is the last thing we need.''
Germany's benchmark DAX index has lost 36 percent this year, making it the worst performer among leading stock indexes in the U.S., Japan and Europe. The economy, Europe's largest, is dragging down the whole region. The dozen countries sharing the euro may contract next quarter, the European Commission said.
Japan's economy has been in a slump for much of the past decade. The real-estate bubble burst in the early 1990s, leaving banks saddled with bad loans that the government now puts at more than $430 billion. That has made banks reluctant to lend, starving companies of the credit they need to grow.
German banks are also holding back lending after plunging stocks eroded their earnings. Many were hurt by rapid expansion in eastern Germany after reunification. Failed real estate investments in eastern Germany pushed Bankgesellschaft Berlin AG close to collapse, forcing a bailout by the state of Berlin.
Banks `Burned'
This year, the four biggest German banks expect to set aside 8.7 billion euros ($8.7 billion) in provisions from loan losses, compared with 5.9 billion euros in 2001. Deutsche Bank AG, Commerzbank AG, HVB Group and Dresdner Bank AG say they will have to charge more to lend money to companies.
``You can't get any credit because the banks have burned their fingers too badly,'' said Poehl. ``If the European Central Bank cuts rates, it has no effect'' on the German economy.
The ECB yesterday trimmed its benchmark refinancing rate half a point to 2.75 percent, the lowest in three years. The Bank of Japan cut interest rates almost to zero in March 2001 and has provided trillions of yen in extra cash in a failed attempt to stop prices falling.
Siemens AG Chief Executive Heinrich von Pierer said after the ECB's decision to lower rates that ``people shouldn't believe it will solve all of our problems.''
German unemployment in November rose to 4.16 million, the highest since Chancellor Gerhard Schroeder was first elected in 1998, after companies including Siemens shed thousands of jobs as earnings declined. The jobless rate reached 10 percent.
Since his reelection in September, Schroeder has raised taxes to help the government meet European Union budget targets. He has met resistance from unions and the upper house of parliament to his plans to ease labor laws and cut unemployment benefits.
``Our democratic system is very limited and only capable of making reforms in small steps,'' Poehl said.

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