The spiral of bad news is spinning ever faster in Germany. Today the increasingly unpopular government of Gerhard Schröder got hit by more depressing reports. First of the European Commission took the German government to task for the budget deficit breaching the 3% of GDP limit this year and next. Economic stagnation this year means that the deficit to GDP ratio is going to be as high as 3.7% or 3.8%. This means the European Commission will have to impose some disciplinary action on Germany, although I remain skeptical much will come of it.

More bad news came from the "Five Wise Men," a panel that advises the German government on economic matters. They warned of rising unemployment and poor economic growth ahead, with GDP in 2002 growing by just 0.2% and not much improvement in 2003 at 1.8%. Germany will once again underperform most of the other European economies. The wise men highlighted specifically in their report that the underlying reasons for the dismal situation are structural in nature. They asked the government to start to address the growth weakness of Germany which are mainly caused by the lack of structural reforms.

To top it all off, Handelsblatt reported today that business confidence has hit an all-time low. The October survey of the German Industry and Chambers of Commerce. In the space of one month, the responses have deteriorated enormously, and the cause of that is the re-election of Schröder and his tax-raising policies. Two-thirds of those surveyed think that Germany's competitiveness will become worse, up from just 14% a month ago. Three-quarters said they fear that the new government will make their lives more difficult. Much more worrying for the German economic outlook is that only 8% of managers said they were going to increase investment in the next year, while 43% said they were going to reduce. Unemployment will get worse, as only 9% of companies say they're going to hire more people, while 54% are looking to reduce their payrolls.

Schröder's personal credibility is in tatters, and his government's is not faring much better. The speed with which he has fallen from grace is amazing, and the situation in Germany is coming close to an acute crisis. With a government that has lost popular support, while only having a wafer-thin majority in parliament, the country is essentially rudderless. The measures that have been announced are only going to make Germany's malaise worse, and the underlying structural problems of high taxes and inflexible labor markets remain unaddressed. This government can't address these issues anymore. Schröder is transfixed by the headlights of the onrushing truck. He's desperately trying to maintain his fiscal credentials in the European sphere by pretending that Germany can get its finances under control again within the limits of the Stability Pact. But this is undermining his popularity and it's hurting the economy, which in turn means he does not have the political capital to undertaking the major structural reforms that are necessary. The election victory bought by pandering to base anti-American sentiments is beginning to look ever more expensive for Germany.