Germany’s robust economy is showing signs of a slowdown, raising fears that the linchpin holding together Europe’s fragile financial health could be weakening.
On Tuesday, the country revealed that its exports in June rose by only 3.1 percent, compared with a 20.1 percent increase in May, marking the smallest increase in 16 months. A few days earlier, an index of German manufacturing activity dropped from 54.6 in June to 52 in July — the lowest level since October 2009, marking the third consecutive month of declines.
“The fact that [the German economy is] showing signs of faltering and sources of domestic demand aren’t manifesting itself — people are worried,” said Tu Packard, a senior analyst for Moody’s Analytics.
Germany has built its economic strength on exports to China and other developing countries. As the global slowdown reduces demand in those economies, Germany could pay the price.
“They’ve managed to protect themselves so far, but what happens when the crisis hits China’s economy? China depends on the U.S.,” said Henry Farrell, a political science professor at George Washington University.
And if Germany’s domestic growth declines at the same time that its exports slow, the double whammy will be felt across the eurozone, which relies on German economic strength to bolster troubled members such as Greece and Portugal.
Markets have begun bracing for any German stumble. On Tuesday, for instance, the price of Germany’s credit-default swaps — a type of insurance against financial risk — exceeded those of the United Kingdom for the first time since January 2008. And although many leading European stocks rebounded on Tuesday after days of record drops, the German DAX declined by 0.1 percent.
The worse the economic outlook for Germany, the more difficult it may be for the German Parliament to agree to provide critical financial support to European Union countries in crisis. German Chancellor Angela Merkel has struggled to balance the need to contain the escalating debt crisis across Europe with tremendous resistance from German politicians and taxpayers who resent bailing out distressed countries they think have acted irresponsibly.
So far, Germany’s conflicted position has slowed efforts by the European Central Bank to address the region’s financial crisis. European market watchers are modestly hopeful that the ECB’s recent move to buy Spanish and Italian bonds could help prevent the contagion of debt problems from spreading.
Both Merkel and French President Nicolas Sarkozy, who has faced similar political resistance at home, publicly affirmed their support for the bond purchase. “France and Germany are confident that the ECB analysis will provide the appropriate basis for secondary-market interventions as it will help determine the case when financial stability of the eurozone as a whole is at risk,” they said in a joint statement this week.
Washington Post
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