July 1 (Bloomberg) -- The German government's plan to speed up tax reductions may encourage consumers to boost spending and companies to buy new equipment, according to the head of European Aeronautic, Defense and Space Co. and other executives. ``This is the right way forward,'' said Rainer Hertrich, co- chairman of EADS, Europe's No. 1 aerospace company, in an interview near Munich. ``I hope this is a trigger to overcome investors' lack of confidence.'' Chancellor Gerhard Schroeder, trying to end a three-year economic slump, said Sunday he will trim taxes for consumers and small and medium-sized companies by an annual 18 billion euros ($21 billion) from January 2004, a year earlier than planned. The measure needs parliament's approval. Europe's largest economy shrank 0.2 percent in the first quarter after stalling in the previous three months. Retailers, expecting sales to decline or stagnate for the tenth year, said the tax cuts may revive consumer confidence after it fell to an eight-year low earlier this year.
Business confidence rose for a second month in June after the European Central Bank cut interest rates to the lowest in the dozen euro nations for more than half a century. The tax reductions, which will also benefit small and medium-sized companies, may help it to climb further, executives said. ``Companies are getting noticeable tax relief and will be better able to plan ahead,'' said Mario Ohoven, president of the BVMW association of small and medium-sized companies. ``Companies should execute planned investments now to accelerate the turnaround in the economy.''
Relief `Welcome'
German retail sales fell 0.6 percent in May from April, the third drop in four months, the Federal Statistics Office said today. Analysts had expected a decline of 0.1 percent. The Bundesbank, which has a different method of adjusting the figures for seasonal influences, said sales rose 0.1 percent from April. ``We welcome any relief for consumers,'' said Juergen Homeyer, a spokesman for Metro AG, Germany's largest retailer. ``The whole climate may improve with this step.''
The German economy, which accounts for about a third of the $8 trillion euro region, has barely grown since a recession at the end of 2001. Unemployment, which rose in 13 of the past 14 months and was near a 5 1/2-year high in May, may damp consumer spending this year, the HDE retail industry group says. ``The tax cuts should generate half a percentage point more growth,'' said Otmar Lang, an economist at Deutsche Bank AG in Frankfurt, Germany's largest ank. ``First it will improve sentiment, then it will boost investment and consumption and finally the labor market.''
State Opposition
Shares in KarstadtQuelle AG, Germany's largest owner of department stores, climbed as much as 7 percent to 18.85 euros yesterday. Executives have resisted investing in goods including factory buildings, machines and computers because of slow demand for their products. Investment and the trade balance dragged the economy down in the first quarter, the statistics office said.
Schroeder needs the support of Germany's states, represented in the upper house of parliament, to bring tax cuts forward. States and town councils have to finance about 60 percent of next year's additional tax relief of 18 billion euros. The government hasn't yet spelled out how it will finance the tax cuts, which threaten to push Germany over European Union deficit limits for the third year in 2004. Schroeder said only that the cuts will be funded with higher borrowing, state asset sales and reductions in subsidies. Concern about financing the cuts may complicate his efforts to push them through the opposition-dominated Bundesrat, or upper house of parliament.
Municipalities `Broke'
``One can't and mustn't agree to these plans,'' said Christian Wulff, governor of Lower Saxony and a member of the opposition Christian Democratic Union, in an interview with ZDF television. ``The municipalities are broke, states like Berlin and Brandenburg are broke.'' CDU chairwoman Angela Merkel said the party can't agree to Schroeder's proposals and urged him to discuss with the state leaders how to pay for the tax relief.
``In view of the situation, raising new borrowing isn't a feasible solution,'' Merkel told television broadcaster N24. Germany, the inventor of the ``stability pact'' to protect the euro, will probably exceed the deficit limit of 3 percent of gross domestic product for a second straight year in 2003. Schroeder said he needs 2 percent growth to avoid infringing the rule a third year.
Widening Deficit
Wolfgang Wiegard, head of the government's panel of economic advisers, said increasing the deficit ``could well be the beginning of the end for the pact.'' Other euro members could borrow more ``without having to fear the consequences,'' he said in an interview with the Tagesspiegel newspaper. Even so, investors said advancing tax cuts and letting the deficit widen may be the best way to promote economic growth. ``In the current situation, it would be sensible to allow higher new borrowing,'' said Conrad Mattern, chief economist at Activest Investment in Munich, which manages 44 billion euros. ``As a one-off case, it is justifiable economically, but after that it is time to forge ahead courageously with reforms.'' Bundesbank President Ernst Welteke said the government's forecast of 2 percent economic growth next year may even ``become reality after the steps the government has taken.'' Speaking to reporters yesterday, Welteke said the tax cuts will ``be a stimulus for the economy in any case.''//www.bloomberg.com