Germany regaining its mantle as Europe's driving force

Germany has finally turned the corner and appears to be on the way to regaining its role as the motor of the European economy, analysts say.

Clear signs have emerged in recent days that the biggest economy in the European Union is emerging from several sluggish years.

Business confidence hit a 15-year high and unemployment dipped below the five-million mark.

Now, observers say, if the economic progress is to continue, Chancellor Angela Merkel has to grasp the nettle of the reforms she promised after coming to power at the head of a power-sharing government in November.

The most spectacular indication of a sustained upswing came from the Ifo business climate index, which surged to 105.4 points in March -- the highest since April 1991, the year after German unification, and up from 103.4 points in February.

The positive domestic picture was underpinned by data from Europe as a whole.

The European Commission announced on Friday that eurozone confidence was at its highest point since mid-2001 after reaching 104.8 points in March.

Importantly for Germany, analysts said the traditional gap between business confidence and consumer confidence was closing.

"Germany's upswing has started to reach the long-depressed consumer," said Holger Schmieding of Bank of America in Frankfurt.

"German consumers have apparently started to open their purses at least a little bit more than before."

He said he expected 2006 to produce the "first meaningful advance in German consumer spending in almost six years, supported by a rise in investment and a small improvement in the labour market".

Every sector, including retail, is exhibiting increased confidence in the future. Order books are full and Germany's strength as an exporter is boosting confidence.

Sylvain Broyer, an analyst at IXIS CIB in Frankfurt, believes Germany is reverting to its role of "pulling along the other European countries".

It was a view shared by Edward Teather of UBS Investment Research in London.

"While the acceleration in German growth may not be repeated in full elsewhere, it should provide a lift to activity growth in Germany's trading partners," he said.

But amid the upbeat news, unemployment still remains the issue on which Merkel's young government will be judged.

The number of jobless fell to 4.976 million this month from 5.048 million in February, the equivalent of dropping to 12.0 percent from 12.2 percent.

But economists have said repeatedly that deep reforms are needed to create jobs -- relying on economic growth is not enough, they argue.

The conservative Die Welt newspaper said in an editorial on Friday: "The worst appears to be over. It would now be tempting for the coalition to sit back and bank on economic growth to reduce unemployment.

"In fact, things are the other way round -- the unemployment problem has to be solved in order for Germany to be able to grow more again. Reforms are needed."

Labour Minister Franz Muentefering admitted that the labour market remained "unsatisfactory".

The "grand coalition", as the government is known, was bolstered by victories for both of its constituent parties -- Merkel's Christian Democrats and the Social Democrats -- in state elections last month.

Merkel, who has enjoyed a political honeymoon since ousting Gerhard Schroeder, said she would wait until after the elections to tackle reforms.

They include the possible introduction of a minimum wage and plans to strip away laws protecting employees against sacking as well as an overhaul of the health-care system.

All have the potential to drive a wedge between the two parties which have widely varying political outlooks.