Tuesday, August 30, 2011

Is the German resilience fading?

Amidst all the gloom and pessimism that has enveloped Europe, the one silver lining has been the surprising resilience of the German economy. Its exports have increased, unemployment rate has fallen to pre-recession lows, and the economy has been fairly robust.

However, given the depth of the problems facing other Eurozone economies, especially the PIIGS, it was to be expected that they started sapping the strength of the German economy. In many respects, Germany, by the mere fact of being the largest economy in the region, is inherently vulnerable to any long-term crisis in its neighbourhood. Its economy is closely integrateed with other Eurozone economies. More importantly, and this is the immediate concern, its banks are heavily exposed to the sovereign debts of the PIIGS economies.

In cliched terms, Germany today is the victim of the adage that "if a bank lends $100 to a person, then its repayment is his problem; whereas if it lends $100 million, then its repayment is the bank's problem!" A periodic survey conducted by the Center for European Economic Research (ZEW) reported that in August its index of current economic conditions in Germany suffered its largest one-month decline since it began to be calculated in 1991.

Though very few analysts see inherent problems with the German economy, more than half of them think the economy will get worse over the next six months, while less than one-tenth of them think the situation will improve over that time. As the crisis has prolonged, the inevitability of Germany being affected increased and the pessimism grew in proportion. The immediate trigger may have been the signals given last month while approving the Eurozone bailout plans that creditors may have to take haircuts. The German banks would be the biggest losers if this were to happen.

No comments: