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Why Germany has stagnated and what it reveals about the economy in Europe



April 17, 2019, 08:02
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Updated April 17, 2019 08:33 AM

The economic locomotive of Europe is giving alarming signals.

In December, the German central bank Bundesbank announced a 1.6% growth, while last Friday, its chairman, Jens Weidmann, lowered this expectation to less than 1%.

This negative figure is not isolated, but is added to the trend that began in the previous year and takes care of one of the world's leading economies.

In the last quarter of 2018, German GDP (gross domestic product) shrunk by 0.2% and did not recover in the first three months of 2019.

Data that is not serious, but in the case of Germany, they are not surprised and worried.

In general, the economy is entering a recession after two consecutive quarters of shrinkage. This means that the biggest European economy has avoided the slightest drop in this country.

Decline in industrial production

One of the reasons for this cooling is the search for the fall in German industrial production in recent months and the collapse of industrial orders, as can be seen from this graph.

According to the Federal Bureau of Statistics, which was the highest in the last year, in February, exports fell by 1.3% compared to the previous month.

Although exports increased by 3.9% in the last 12 months, short-term forecasts do not seem positive.

Problems coming from China

The study, published in early April, showed that orders and exports "are falling at a rate that has not been since the last global financial crisis."

Reducing Chinese demand, one of Germany's major buyers, is one of the key factors in this trend.

Why is the German economy important?

How it goes to Germany, whose economic activity accounts for 29% of the total euro area, depends to a large extent on the progress of the rest of Europe.

It also has a direct impact on the rest of the world. Germany is the fourth global economy, surpassed only by the US, China and Japan, and the third largest exporter in the world, China and the United States.

With Latin America, economic ties are also intense.

Berlin is the fourth exporter of some of the main Latin American economies, such as Argentina, Mexico, Colombia or Chile. And the third region, which as a whole, complies with the International Monetary Fund.

Positive data

However, not all German economic indicators are negative. The country's unemployment rate of 3.1% remains among the lowest in the world and continues to decline in this period when GDP was poor.

The construction sector is one of those who continue to contribute positive data for the German economy AFP

In the group of more developed economies, the unemployment rate is lower only by the Czech Republic, Iceland and Japan.

Also, the percentage of working age population working in the last two quarters of 2018 increased by 0.2%.

The explanation of this obvious contradiction between the various economic indicators can be found in the fact that services and construction, although industrial production flows through a delicate moment, experience the moment of expansion and maintain a strong internal market.

Situation in the euro area

On the other hand, the deceleration of growth in Germany does not happen separately from the rest of the euro area, which has suffered in recent months.

Although some countries – such as Spain, in the large euro area economies – continue to make good progress, others, such as Italy, are in a recession.

Indeed, the Italian economy did not recover the size it achieved before the financial crisis ten years ago.

Unlike Germany, the situation of unemployment in other European countries varies greatly from country to country. In the euro area, the average is 7.8%, which is a relatively high value.

In countries such as Italy, Spain and Greece, double-digit rates are maintained, which, in the case of Greece, are up to 18%.

Tariffs in the United States and Brexit

The reasons for the economic problems in Germany and the euro area as a whole are different.

On the one hand, the recovery after the financial crisis never ended.

On 10 April, the EU and the United Kingdom agreed to extend the Brexit deadline by 31 October 2019 GETTY IMAGES

Over the past year, the region has been affected by the poor state of world trade. In addition to the above cooling of the Chinese economy, they were also affected by the tariffs imposed by US President Donald Trump on imports of steel and aluminum.

The possibility that these tariffs would also apply to car imports would have an even more detrimental effect, especially for the German economy.

On the other hand, the uncertainty stemming from the lack of an agreement on Brexit was another factor that was mentioned by German companies in surveys when asked about the reasons for poor economic progress.

Internal factors

However, the recent extension of the negotiations between the United Kingdom and the European Union has had a positive impact on the morale of German investors.

Drought forced to restrict traffic in the Rhine, one of the major industrial arteries in Germany GETTY IMAGES

The ZEW indicator, developed by the Leibniz Center for European Economic Research in Mannheim, measured the mood of the economy, rose to 3.1% in April and introduced positive numbers for the first time since March 2018.

But the German economy was also exposed to internal factors, such as the introduction of new ones tests emissions, which last year affected automobile production.

This also affected the drought, which forced the restriction of the transit of goods for the river Ren, an important trade artery for the German industry.

(Some) options of the ECB

Given this situation, one of the key issues is what the European Central Bank can do to promote growth in Germany and Europe.

The options available to you are limited and the use of economic policy as a tool to prevent the cooling of the economy can be complicated.

The interest rates of the European Central Bank are already at the lowest level. The main interest rate is zero, the value of the loan is 0.25%, and the deposit interest rate is -0.40%.

At the end of last year, the European Central Bank closed its policy of "quantitative expansion", which included the acquisition of funds with newly created money.

The return to such measures is possible, but there are complications. For some types of assets, the ECB is approaching the maximum amount it wants to have, without distorting the market too much.

From a political point of view, this measure would be difficult, especially in Germany, where it was always suspected.

"Getting money", as sometimes called this program, can lead to an increase in inflation, and in Germany arouses fear of this phenomenon, which has severely affected the country in the first half of the 20th century.

What can the German government do?

Other tools to reactivate the economy, such as tax cuts or an increase in public investment, are in the hands of the German government.

Many economists argue that Germany has the space to choose this route. The German government spends less than it collects in taxes, but reluctantly uses its finances to promote the economy.

The latest recommendations of the European Commission underline the need to continue to use "prudent" policies that ensure the sustainability of the accounts of the governments of the Member States.

On the other hand, some critics consider that the rules of the European Union regarding the accounts of the governments of the euro area are too restrictive.


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