Eh Tu Germany? Finance Minister Says "No Alternative But To Borrow"

Germany, the last of the stalwarts fighting to heed the European Union�s limit of 3 percent budget deficits, is about to throw in the towel.

Please consider German Budget Plan Foresees Record Borrowing.

The new center-right German government agreed Wednesday on a budget that would drastically ramp up borrowing � and the deficit � next year as the country emerged from its worst economic crisis in decades. The 2010 budget for Germany, the largest European economy, is 7.3 percent larger than the one for this year, rising to �325.4 billion, or $474.3 billion.

Much of the extra spending would be earmarked for the Labor Ministry: Payouts for unemployment were expected to rise along with the number of jobless because of the continuing weak economy. A few perks were included in the proposal as well, like an additional �20 a month in family allowances and a reduction in the value-added tax on hotel bills.

About 20 percent of the budget will be financed by new government borrowing, which will more than double, to �86 billion in 2010, from �37 billion this year. �What we are looking at frankly is the worst budget situation since the war,� said Steffen Kampeter, deputy finance minister.

Wolfgang Scha�ble, the conservative finance minister, said during a debate by the Parliament�s budget committee that the government had no alternative but to borrow.

Mr. Scha�ble said this year�s budget deficit as a percentage of gross domestic product would be 2.9 percent to 3.1 percent, which suggests that Germany might just meet the European Union�s limit of 3 percent. Next year, however, the deficit is likely to rise to at least 5 percent of G.D.P., Mr. Scha�ble said.

Carsten Schneider, a lawmaker and budget expert for the opposition Social Democrats, called the budget plan unacceptable because, he said, there were no details about how the deficit reductions would be accomplished.

Who Coulda Thunk?

Just a few days ago someone was buying UUP dollar calls. There were 340,000 calls traded vs. 183 puts. Coincidence?

What Happened Since

• Additional downgrades of Greece by Moody�s
• Action by the ECB on covered bonds
• German budget deficit about to balloon

There is a very big difference between a concentrated bet by one or two players and the masses speculating in calls. That trade smacked of someone knowing something (or thinking they did, and in this case correctly).

Germany Reduces Military Budget

The article points out ...

Germany's military budget will be reduced next year by 0.1 percent, to �31.1 billion. Even though the decline is marginal, it could send a negative signal to the 4,300 German troops based in northern Afghanistan, who have been demanding more sophisticated equipment to protect themselves against insurgents.

It could also send the wrong signal to Germany�s NATO allies just at a time when the United States has asked NATO to send an additional 7,000 troops to Afghanistan. Germany was asked this week to provide a minimum of 500 more troops.

My advice to Germany is to beat the rush, pull all its troops out now, and cut its military budget further. My advice for the US is the same.

Thoughts On The Dollar Rally

My friend "BC" offered an opinion this morning that is well worth considering. "BC" writes:

A resumption of a US$ rally will coincide with another giant sucking sound of US firms' investment and trade credits leaving China and China's so-called "export" sector (US firms' subsidiaries' exports) contracting further.

This will require the PBOC to attempt to print money even faster to make up for the loss of export income and jobs, increasing the already high risk of a banking system and financial implosion at some point hereafter, and perhaps soon.

China is overheating as I have said many times recently. Globally, the question is when this stimulus nonsense blows up, not if.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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