Many observers attribute recent data showing sluggish business activity in Germany to geopolitical crises, especially the sanctions against Russia. Yet even if fears about an escalation in the confrontation have dampened the national mood, the actual cause for the economic slowdown lies elsewhere.
As a 10 percent drop in orders from the euro zone illustrates, the greatest danger to the German economy comes not from the East but from the West. In particular, the persistent stagnation in France and the sagging economic performance in Italy have had a negative impact on the growth dynamics of the euro zone. All economic indicators point to little or no improvement in the near future.
Both countries lack a clear direction in their economic policy. While the Italian Prime Minister Matteo Renzi is credited with at least making an effort to achieve reforms – though without any palpable successes so far – French politicians remain caught up in the long-standing tradition of state intervention. The French fail to realize that in order to stimulate growth, it’s necessary to reduce the excessive powers of the state.
Spain shows there is another way: The extremely painful structural reforms of the past few years are now bearing fruit as economic growth has increased for six consecutive quarters. This revitalization is contributing to a reduction in unemployment, though the current rate of more than 20 percent is obviously still much too high.
Weak economic growth in the core European countries is leading to their ongoing failure to meet deficit targets while increasing government debt. This combination makes a renewed flare-up of the European debt crisis seem likely. Indeed, the recent decline on the European stock markets signals that the protagonists are renewing their focus on fundamental data and have brought expectations into line with economic reality.
Weak economic growth in the core European countries is leading to their ongoing failure to meet deficit targets while increasing government debt.
It’s likely only a matter of time until this is also the case for bond markets. This, in turn, would lead to significantly higher interest rates for government securities issued by the peripheral countries, where current rates of return don’t come close to reflecting actual risk. Increasing yields, however, would again put the focus on the debt sustainability of these countries. The result could very well be an escalation of economic woes all the way up to a “Debt Crisis 2.0,” but with a significant difference. The European Central Bank has no more aces up its sleeve and very few possibilities to calm the markets.
Germany’s export markets are located primarily in the euro zone. Last year, almost 10 percent of German exports went to France and 5 percent to Italy, while only a little more than 3 percent went to Russia. Thus, the weak growth in the core European countries is having a strong impact on the German export economy. In addition, the most recent figures show this slowdown is no longer being cushioned by vigorous domestic demand.
After a weak second quarter, it must be assumed that the third quarter will scarcely be more dynamic. The FERI EuroRating Services AG, a Frankfurt-based rating agency and forecast institute, predicted a 1.7 percent economic growth for this year. In January, this prediction seemed pessimistic amid the host of competing estimates, but now looks increasingly realistic.
There are two challenges facing German politics. First, the country must once again make its influence felt in Europe so it can push ahead with necessary reforms. If the expansive monetary policy of the European Central Bank were finally complemented by an adjustment of the general framework of economic policy, the monetary union would become less susceptible to crises. Second, it must set a good example for reform. A nation that balks at necessary adjustments regarding the retirement age will scarcely be able to persuade other countries to legislate reforms in their own old-age pension systems. In view of weak economic growth, a readjustment would be both sensible and necessary.
Concerns over sanctions and the situation with Russia are not misplaced, but it’s clear that Germany’s real economic issues lie within the euro zone.
Axel D. Angermann is chief economist and a member of the management board of FERI EuroRating Services AG. He can be contacted at firstname.lastname@example.org