Wednesday, 5 September 2012

The European crisis comes to Germany

September is shaping up to be an important and revelatory month for Europe.

Firstly, Greece will be assessed later in the month on their progress of fulfilling the loan conditions set by the European Central Bank, European Commission and the International Monetary Fund.

No European leader expects the Greek report to be anything but unsatisfactory. Greece is far from safety and could need further assistance from the various European funds in the short term.

This is causing new ripples of debate in Germany, where the bulk of the European bailout funds originate. German Chancellor Angela Merkel still retains deep support in her country but the voices from her rivals are growing louder, calling for Greece to be cast off from the Eurozone because it constantly fails to reform and undertake structural alterations.

A Greek exit (or ‘Grexit’ in some circles) may be inevitable even with more money offered to Athens. So although the dire situation can be quelled right now, it may not be long before Spain, Italy, or Ireland start spiralling again.

Secondly, the German Bundestag expects to make a decision in September regarding the constitutionality of the controversial European Stability Mechanism (ESM).

If the institution that was set up as a lending capacity for poorer European nations passes through the German government successfully, Brussels will essentially have independent control over German funds.

The least harmful resolution to the current crisis may be for Germany to become the European financial sponsor. Perhaps this concept, and the consequences, will be too much for the sovereign, democratic people of Germany to accept.

Recent polls reveal that while 50 percent of Germans want their country to remain in the Eurozone, German elites understand how unpleasant the situation would be.

If Germany could get on with its history apart from Europe, they reason, Germany could continue to live prosperously and enjoy one of the strongest economies in the world and easily the strongest in Europe in terms of gross domestic product.  

When the EU was created, trade tariffs were removed to allow the unrestricted flow of goods around Europe.

Other countries, especially in the periphery, were saved from relegation to poverty by the free-trade zone. As the common European currency was introduced trade became even easier and Germany became wealthier.

But business sentiment in Germany fell for the fourth successive month in August according to the closely monitored IFO survey. And more than anything, it is business and trade with other European nations that keeps Germany rich.

A new study from the prominent Hong Kong based think-tank Gavekal suggests Germany herself may be about to taste a mild recession after all.

2012 has been dismal for Germany as their economic activity slowed. German IFO Business Expectations Index suggests fourth quarter readings may go negative. Germany would then be in a recession, although admittedly a mild one in comparison with other European nations.

The ongoing struggle in Europe is a tale of slow but inexorable contamination as, one after the other, member countries stumble and falter.  

As the European leadership focuses on recovery, the all-important goods orders from around the Continent have dried up. Some reports indicate Germany may register the world’s largest trade surplus of up to 200 billion U.S. dollars in the fiscal year of 2012.

The authors of the Gavekal study explain that a recession may have already started in Germany.

Compounding the supply orders collapse, the historically low interest rates, introduced to assist the peripheral European countries, are pushing up house prices in Germany risking a situation at home identical to what Berlin was ameliorating elsewhere.  

Indeed, last week’s study predicts sharp declines in capital spending and net exports as the most likely outcome of a recession. Assessing the export and output data of Germany’s EU export destinations and the fact that Germany is a huge importer also, the Gavekal report ultimately warns:

"There can be no escaping the fact that reduced German imports must cause a decline in French and Italian exports. This will likely be a shock for those who expect the German juggernaut to drag the southern economies back to growth. To put it bluntly, Germany will very shortly be subtracting from growth in the rest of Europe."

Up until recently, Germans were under the impression that the economic crisis would stop at the Rhine, the traditional separation line between the fiscally drowning states of Southern Europe and the relatively flourishing core countries.

Germany's power lies not just in its ability to export thousands of tons of goods each year overseas to Asia or America, but also in the trust that the rest of Europe will buy those goods too.

If orders begin to dry up as the Europe contagion slowly spreads, then Germany will continue to suffer. If the authors of the mentioned study are even close to the mark, the current European strategy of expecting Germany to foot the bill if things turn sour is seriously flawed.

German Chancellor Angela Merkel has painted the image of being the guard of German wealth, while at the same time agreeing repeatedly to bailouts. This image is falling apart.

Supporting the Eurozone without receiving clear improvements in their own economy is beginning to tire German taxpayers.

And as the German economy slows, convincing those voters that the survival of the European Union is worthy of investment and sacrifice (in regards to delegation of power to Brussels) will be extremely difficult for Merkel’s government.

Given these uncertainties it would be a bold investor indeed to buy into the Eurozone.

As featured on The National Business Review:

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