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Germany’s Economy: Technical, tactical… too late?

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“We are not in a recession,” the Minister finance Wolfgang Schaeuble told parliament after the 3rd quarterly data was released. Despite being hampered by weakness in the French economy, a main trading partner, and a slowdown in China the German economy displayed enough tenacity enduring long enough to squeeze out fractional growth. Following the 0.1% contraction in the second quarter analyst adhered to the belief that Germany might technically fall into a recession, under the definition of two consecutive quarters of contraction.

 

Often referred to as the backbone of Europe’s economy the pressure is on for Germany as it attempts to pull a large part of Europe out of a recession. Noticeable now, more than ever is that a slowing German economy is leading to an even slower growing European economy. During the 21th century there has been a tacit consensus that Germany will need to play the role of counter weight as to balance out the struggling EU members. But is its legacy as the power house of Europe coming to an end?

 

Despite its image of economic prosperity Germany’s economy has actually only grown by 1.1% a year in the past decade. Though this may seem unremarkable it is important to note that such traits are the nature of a stable economy, best reflected through its low amount of national deficit. Currently under heavy criticism, economists believe that it should contradict its national austerity based agenda and entice spending and foreign direct investment.

 

It is argued that Germany should do more to stimulate domestic consumption and investment, as this would help countries like France and Italy as they undergo tough structural reforms. The current debate among economist is as follows: higher imports would reduce Germany’s current-account surplus, the largest in the world, and a cause of imbalances within Europe and beyond. Yet conveniently, and as per usual, the only country with tangible capital is being pushed into spending it, this sort of reckless monetary policy is what rendered many of these countries to their current states. The stubbornness and reluctance of the German government to comply with these pre-emptive spending measures is understandable, considering that Germany is the only EU country to have maintained its economic strength in the past decade and is currently being pressured out of its comfort zone. However Germany should be careful not to fall into a trap of institutional hubris, the importance of a functioning European economy cannot be understated and is of great importance especially to the likes of Germany, since its economy is largely based on the export of machinery.

 

Many of Germany’s issues however stem from current Euro – Russia relations, as the previously imposed sanctions are stagnating economic development. The sanctions imposed in June, which made doing business with specific Russian companies that contribute to the deterioration of the situation in Ukraine a taboo. In addition to this European development banks have also been banned from providing loans to Russian companies.

 

The United States on their part have reprimanded many Russian corporations namely the oil barons such as Rosneft, Novatek and Gazprom bank. Specifically they have been banned them from borrowing or lending from American fiscal institutions or investors with affiliations to the US. European companies, having to comply too the American penalties, is adding more pressure on German companies as the fiscal climate begins to tighten. Due to these sanction business has been slowing at all levels; companies such as Volkswagen, E.on and Opel have been forced into taking radical measures to combat that capital lost due to declining Russian Economy.

 

The solution to Germany’s and Europe’s short term economic recovery is not highly convoluted. Simply put, Germany needs reduce its current balance surplus and start injecting capital into the economy as well as maintaining or refurbishing certain aspects of its infrastructure. “Germany fails to recognize that the relative health compared to the rest of Europe doesn’t mean that it’s doing its homework and that economic policy is right, and Germany needs to do its homework, still has a lot to do,” argued Marcel Fratzscher, the president of the German Institute for Economic Research. Germany needs to stop focusing on the deficits that incur as a result of investment and start spending, as markets are beseeching them for stimulus.

 

More specifically, in order to revitalize the German economy and by default the more general European economy with the added benefit of limiting inflation, the ECB needs to start buying euro denominated covered bonds as well as simple and transparent asset-backed securities (ABSs). The results of this will primarily include enhancing the transmission of monetary policy, facilitating the provision of credit to the euro area economy and a trickledown effect into other markets. Furthermore the ECB predicts that these measures will contribute to a return on inflation rates to levels closer to 2%. Essentially the German economy in conjunction with aid of European Central Bank needs to halt austerity measures and look at its situation in terms of the bigger picture, thus reviving the German economy into a state of sizeable growth while allowing the remainder of the Euro zone to pick up as well.

 

by Karim Zaghloul