By Oren Laurent
President, Banc De Binary
The German economy has long been hailed as Europe’s economic propeller, its healthy saviour that would drive and fuel the continent’s post-recession recovery. Germany’s economy is certainly Europe’s largest, but that doesn’t make it Herculean. Recent reports suggest that the country’s fiscal health is not in such an impressive state that it can also be depended upon to support its weaker neighbours.
In the second quarter of 2014, German GDP shrank 0.2%. This fact is not so worrying in itself: a mild winter led to increased activity in the first quarter at the expense of the second, and the country is enjoying record-high employment and rising wages. A return to growth is anticipated in the third quarter.
Yet, the optimistic forecast of Germany’s central bank, the Bundesbank, is not enough to compensate for the non-existent growth in France and Italy. It is not enough to inspire hope given that the Eurozone’s economy has expanded just 0.7% over the past year. It is not enough to reassure nervous investors. Concerns about the continent’s overall outlook helped to drive the yield on Germany’s 10-year bond, traditionally considered a haven, to below 1% for the first time.
It would appear that the sluggish economy in Europe is having an impact on Germany, rather than it being the case that Germany is giving Europe a boost. Despite the previous relative strength of German manufacturing and trade, business investment is now slowing. The repercussions of this are wide reaching. German business confidence was down for a fourth consecutive month, falling from 108 in July to 106.3 in August, according to the Ifo institute’s business climate index. The DAX index of German stocks has lost around 7% since closing at a high in early July.
If Chancellor Merkel wishes to retain her popularity in the polls, she needs to save Berlin. Germany needs to calculate how best to secure its own economic prosperity. It needs to re-strategise and adapt its export-driven economy to the reality that its European neighbours are struggling and that sanctions currently make Russia less relevant as a major trade partner.
As it stands, Germany cannot save Europe, and it is not reasonable for us to expect it to do so. Perhaps Germany needs to promote itself better and to define its economic policies and how it will adapt to the current global market. It needs to attract investors for itself who are deterred from the Eurozone as a whole. Then, and only then, might it flourish enough for the rest of the continent to benefit.
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