BERLIN, Feb. 22--German voters have dented Chancellor Gerhard Schroeder's recent political comeback and given him a sharp reminder that mass unemployment could yet derail his bid for a third term, Reuters reported.
Schroeder's Social Democrats (SPD) were beaten into second place by the conservative Christian Democrats (CDU) in the northern state of Schleswig-Holstein, a state the SPD has ruled for 17 years and was favored to win.
The result, which left neither party with a governing majority, comes three months ahead of elections in the key industrial state of North Rhine-Westphalia, a Social Democrat heartland seen as crucial to Schroeder's 2006 re-election bid.
"This is a serious warning for the government," said Karl-Heinz Nassmacher, a political scientist at Oldenburg University.
Schroeder had enjoyed a bounce in popularity over the last few months, standing firm in the face of mass protests over tough reforms and profiting from opposition splits. But the result opened questions about whether he has peaked too early.
Soaring unemployment weighed heavily in Schleswig-Holstein, which has one of the highest jobless rates in western Germany.
Schroeder came to power in 1998 on promises to halve unemployment. Instead the number of jobless has grown, rising to over five million for the first time since the 1930s last month.
"The SPD underestimated the effect of the drastic warnings from the labor market had on voters," business daily Handelsblatt said in an editorial.
The result eased pressure on CDU leader Angela Merkel, who has struggled to impose her authority on an often fractious party and fuelled opposition hopes of a strong showing in the run-up to next year's federal vote.
"It is a signal for North Rhine-Westphalia and also for the federal elections," she said on Monday. National elections are due at the end of 2006.
Official preliminary results showed the Christian Democrats (CDU) and liberal Free Democrats (FDP) had won 34 of the 69 seats in state parliament, while the SPD and the Greens took 33. That left three possible outcomes.

BRUSSELS, Belgium, Feb. 22--European Union states remained deeply divided over the bloc's budget for 2007-2013 on Monday, and expressed doubts over a planned new growth fund, Reuters reported.
Luxembourg, which holds the EU's rotating presidency, said that after a series of technical debates on the budget, member states would soon begin the final phase of negotiations to try to reach an agreement in June.
"Serious business will start in the next few weeks," Luxembourg Foreign Minister Jean Asselborn told reporters during a meeting of the blocÕs 25 foreign ministers.
Diplomats said that six net payers, led by Germany and France, had stuck to their guns in efforts to cap spending at the current level of 1.0 percent of gross national income (GNI), which would translate into 815 billion euros ($1,064 billion) over seven years.
Some other member states sided with the proposal of the EU's executive Commission to set the budget at 1.14 percent of GNI on average over the period, or some 930 billion euros.
Others, notably Finland and Estonia, argued for a budget of 1.1 percent of GNI, diplomats said.
"As is the tradition, the net payers raised the issue of keeping the budget at below 1 percent of GNI," an EU diplomat said.
The Commission has warned that if the EU fails to agree on the budget before June, EU financial planning will be thrown into chaos, threatening the timely allocation of billions of euros (dollars) in regional aid.
It argues that spending needs to grow to properly finance EU expansion last May, when 10 states, mostly ex-communist, joined.
Spain, Greece and Portugal, which have so far received the bulk of EU aid, are afraid that a smaller budget would deprive them of funds in favor of poorer, ex-communist members.
On Monday, the ministers debated a planned common fund to boost the EU's competitiveness and research and development as well as pro-growth initiatives, which the Commission proposed at about 122 billion euros over seven years.
Nearly all countries opposed the creation of a so-called Growth Adjustment Fund, worth up to seven billion euros, which would channel money that member states have not managed to spend on regional development.

PARIS, Feb. 22--Russian prosecution of the oil group Yukos is hurting investment in the country, Finance Minister Alexei Kudrin acknowledged Tuesday in an interview with French financial daily La Tribune, AFP reported.
"We understand the worries of investors. When a lawsuit is under way, you are simply afraid of investing. It's understandable. And it does not encourage investments," Kudrin admitted.
On Dec. 19, Yukos was forced to sell its main production subsidiary, Yuganskneftegaz, to the Russian state-owned oil firm Rosneft to settle tax evasion charges.
The campaign was widely seen as politically motivated, and other Yukos assets are expected to be sold this year.
Kudrin declined to comment on a lawsuit filed with a UN trade law commission by Menatep, the biggest Yukos shareholder, which has claimed $28 billion (21 billion euros) in damages from the government's seizure of Yukos assets.
Kudrin also said he is not involved in the issue of tax claims being made against Vimpelcom, Russia's second-largest telecom operator.
But he added, "These rumors of a new offensive against the oligarchs are unfounded," while claiming that the government is enacting measures that grant greater independence to tax authorities.
Kudrin was referring to businessmen who made billions in the first hectic period of post-Soviet reform, often by buying strategic state-owned industries.
Regarding Russia's economic outlook, the finance minister said he is confident annual economic growth can be maintained at six-seven percent per year, following a 7.1 percent rise in 2004.
"But it's true that industries are confronted with higher costs, like the sharp rises in wages, or gas and electricity prices," he noted.
Inflation should not exceed 8.5 percent this year, after an increase of 11.7 percent in 2004, Kudrin said.
He added that Russia would be ready to join the World Trade Organization either this year or in 2006.

Homeless men huddle under a tarpaulin in New Delhi. (AFP File Photo)

India's Congress-led government is likely to unveil fresh economic reforms and new privatization targets in its annual budget next Monday while striving to appease its communist backers by spending on the poor, analysts say, AFP reported.
The government, which came to power last May on a pro-poor ticket and with the key support of the communists, is under enormous pressure to funnel money into the health, education and social sectors.
It will probably resort to hiking taxes, improving tax compliance and cutting tax exemptions to contain the fiscal deficit, experts say.
Political and economic analyst Praful Bidwai noted that India's Harvard-educated Finance Minister Palaniappan Chidambaram would in his second budget on Feb. 28 have to deliver on "fundamental" promises made to the electorate. "Chidambaram is politician enough to know that the government will be kicked out if the budget is not people-friendly. The government has a fundamental obligation to provide public services like health, education and infrastructure to the people," said Bidwai.
"He knows it's far more important than being investor-friendly," he added.
Prime Minister Manmohan Singh's government wants to double annual health and education spending to roughly $50 billion, according to finance ministry officials.
Boosting tax revenues is essential for Congress to fund its ambitious spending plans under its Common Minimum Program, the political blueprint it drafted in conjunction with its coalition partners and the communists, and meet its target of seven to eight percent annual growth, say experts.
"Raising revenues through corporate and personal taxes is the only way to pay for India's growing education and health bill. The government has to keep a grip on the fiscal deficit and borrowings to sort out the country's messy public finances," said tax expert Arun Arora at Delhi's Centre for Strategic Business Studies.
Out of India's billion-plus population only 20 million people or two percent pay tax, experts say. "The finance minister is committed to reforming the tax structure and making sure there is less evasion," noted Arora.
The Congress-led coalition has already made implementing Value Added Tax (VAT) one of its priorities and has prepared the ground to ensure that it comes into effect on April 1. VAT, agreed at a meeting of state finance ministers in New Delhi in June last year, is designed to cut multiple layers of tax, boost revenues, reduce inter-state barriers to trade and make accounting more transparent.
The much-delayed tax reform has been put on hold several times because of loud opposition from the states, which fear they will lose revenues and are reluctant to cede their powers to set taxes on goods and services.
"The budget is likely to introduce other tax reforms to tackle the problem of evasion," said Arora. "The finance minister might take up recommendations to scrap tax breaks on government pension funds."
Last July, a panel of experts led by former International Monetary Fund official Vijay Kelkar recommended scrapping tax breaks on government-run saving schemes for individuals.
The Kelkar report, which is likely to form the basis of tax measures in Chidambaram's budget, also suggested narrowing income tax to a two-rate structure from the current 10, 20 and 30 percent tiers.
However, experts say that the left's protests will not sap the government's enthusiasm for reforms, particularly privatization.
"The budget will contain ambitious privatization targets ... The government has already identified 44 state-run companies where it wants to partially offload equity and the process will be kicked off after the budget," said analyst Swaraj Thapa in an article published in India's leading financial daily, the Business Standard.
"It has promised routing of a substantial chunk of the privatization proceeds for education and health," added Thapa.
Prime Minister Singh's government has pledged to slow privatization and has slashed privatization targets to 40 billion rupees for the fiscal year 2004-2005 from a better-than-expected 155.5 billion rupees in the previous year.

WASHINGTON, Feb. 22--The world's biggest economy is poised to "motor ahead" during 2005 and largely ride out some likely "potholes" presented by twin deficits, but fresh interest rate hikes loom on the road ahead, a panel of top US business economists said Tuesday, AFP reported.
US gross domestic product (GDP)--total economic outputÐ-was forecast to grow 3.6 percent in 2005, albeit at a slower pace than the 4.4 percent expansion notched up in 2004, said a National Association of Business Economists (NABE) panel.
"Our forecasters expect the economy to motor ahead at a solid pace, despite potential potholes presented by our twin deficits," said Carl Tannenbaum, chairman of the NABE Outlook Survey and chief economist at LaSalle Bank in Chicago.
"While the fiscal and trade issues that face the country could have a significant impact in the long run, they do not appear to be hindering our short-term economic performance," Tannenbaum observed.
The panel of 37 top business economists expects the US budget deficit to fall to $386 billion in fiscal year 2005 compared to 2004's projected 412 billion.
On the trade front, "a further deterioration" is expected and imports are seen exceeding exports "by a record-breaking 615 billion in 2005."
Rising interest rates, geopolitical uncertainty and "corporate caution" were cited as "hindrances" that could affect the country's economic engine.
The panel expects the Federal Reserve to raise its key federal funds rate--the main rate used for interbank loans--to 3.5 percent by year-end 2005 from its current pegging of 2.5 percent.
The expected fresh rate hikes are seen applying a slight brake to home sales.
"Housing starts are expected to decline from 2004's sizzling 1.9 million level to a still respectable 1.8 million in 2005," the top economists predicted.
Weighing the economic positives against the negatives, the NABE economists cited an improving labor market and accommodative monetary policy and fiscal policies as boosting their outlook.
The US unemployment rate is projected to average 5.2 percent during 2005.
On the currency front, the NABE outlook called for the dollar to "stabilize" against the euro at 1.30 dollars.
Demand for the greenback is likely to remain supported by "strong demand" for US assets by overseas investors, the NABE panel added.

A couple look at traditionally designed gold necklaces at Dubai City of Gold. (Reuters File Photo)

DUBAI, UAE, Feb. 22--Gold jewelry sales are slipping across most regions of the world and marketing must be boosted to compete with threats to the precious metal, industry experts said Monday, AFP reported.
"The mainstay of gold demand has been under pressure," Philip Olden, World Gold Council (WGC) managing director for marketing and jewelry, told the opening of the Third Dubai City of Gold Conference.
"More recently, the gold jewelry market has been on the decline," he said.
"Marketing investment in gold has been weak and volatile," Olden added, listing the main rivals to gold as "leisure, electronics, accessories and lifestyle brands" rather than other jewelry categories.
A WGC survey showed that in Saudi Arabia for example, where like the rest of the Arab world purchasing gold jewelry is seen as a good investment, a majority of consumers said they preferred to spend on other goods, as was the case in the United States, Italy and urban India.
"Gold jewelry needs marketing," which can have an effect even in mature markets, Olden told the two-day gathering of more than 300 delegates and industry experts from around the world.
He explained that gold jewelry, which accounts for 80 percent of the gold market, needs marketing.
The market must improve gold's desirability and be more consumer focused while the industry needs to "collaborate more and drive consumer demand for gold jewelry," said Olden, adding that "positive jewelry demand supports investment demand."
The Middle East is a priority market for gold, with the world's highest per capita sales, and Dubai, the self-styled "City of Gold", serves as a hub for the region, according to Olden.
In Dubai, which had almost five million tourists in the first nine months of 2004, 90 percent of visitors to the affluent Persian Gulf emirate enter one of its 1,000 jewelry shops, where more than 150 tons of gold are sold a year, participants said.
Tawhid Abdullah, chairman of the Dubai Gold and Jewelry Group, said that with the help of industry experts, "we want to form a committee that will develop a global jewelry marketing strategy". The aim would be "to create a campaign and a positioning that builds a relevant ... appealing image to younger audiences and modern consumers."