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Why Germany stagnates and what it reveals about the economy in Europe

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

Europe's economic locomotive emits worrying signals.

Although in December, the German central bank, the Bundesbank, predicted a 1.6 percent increase, last Friday, its president, Jens Weidman, lowered expectations to less than 1 percent.

And this negative figure is not isolated, but is added to the trend that began in the previous year that worries one of the world's leading economies.

In the last quarter of 2018, GDP (Gross Domestic Product) decreased by 0.2% and did not recover in the first three months of 2019.

Data that is not serious, but it makes a surprise and concern in the case of Germany.

In general, the economy is thought to have entered a recession after two consecutive quarters of contraction. This means that the biggest European economy has avoided the slightest decline in that country.

Decline in industrial production

One reason for this cooling is to demand this in the fall of German industrial production in recent months and the fall in industrial orders, as can be seen on this chart.

In February, the decline in exports was 1.3% compared to the previous month, according to data from the Federal Bureau of Statistics, which is the highest in the last year.

Although exports increased by 3.9% over the past 12 months, short-term prospects do not seem positive.

Problems coming from China

A study published in early April showed that orders and exports "are falling at a rate that is not seen by the latest global financial crisis."

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

Why is the German economy important?

How it goes to Germany, whose economic activity represents 29% of the entire euro area, depends largely on the progress of the rest of Europe.

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

With Latin America, economic ties are also intense.

Berlin is the fourth exporter of some of the major economies in Latin America, such as Argentina, Mexico, Colombia or Chile. And the third part of the region is taken as a whole, according to the International Monetary Fund.

Positive data

However, not all German economic indicators are negative. The country's unemployment rate of 3.1% remained one of the lowest in the world and continued to decline even in this period when the GDP performance was weak.

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

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

The working-age working population also grows at a rate of 0.2% in each of the last two quarters of 2018.

The explanation of this apparent contradiction between the various economic indicators can be found in this, although industrial production is going through a delicate moment, services and building are facing a moment of expansion and a strong internal market is maintained.

Situation in the euro area

On the other hand, the brakes for German growth are not isolated from the rest of the eurozone, which also suffered in recent months.

Although some countries – like Spain, in the big economies of the eurozone – have continued to grow in good momentum, others, like Italy, are in recession.

In fact, the Italian economy did not regain the size it had reached before the financial crisis 10 years ago.

And, unlike Germany, the unemployment situation in other European countries varies greatly from country to country. In the euro area as a whole, the average is 7.8%, a relatively high figure.

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

Tariffs in the United States and Brexit

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

On the one hand, recovery after the financial crisis has never become complete.

On April 10, the EU and the United Kingdom agreed to extend the deadline for Breits to October 31, 2019. | GETTY IMAGES

In the last year the region was affected by the poor global trade situation. In addition to the aforementioned cooling of the Chinese economy, the tariffs that had and the US President Donald Trump imposed on the import of steel and aluminum had an impact.

The possibility of these tariffs also apply to the import of cars will have even more detrimental impact, especially for the German economy.

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

Internal factors

The recent extension of the period of negotiations between the United Kingdom and the European Union, on the other hand, had a positive impact on the morale of German investors.

Drought forced to limit circulation in Rhine, one of the major industrial transport arteries in Germany | GETTY IMAGES

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

But together with the circumstances of the international context, the German economy was also exposed to internal factors, such as the introduction of new tests of emissions, which had an impact on car production last year.

It also affected the drought, which forced the restriction of goods transit during the Rhine River, an important commercial artery for the German industry.

(Several) options of the ECB

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

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

The interest rates of the European Central Bank are already at the lowest level they can be. The main rate is zero, the one applied to the loan is 0.25%, and the deposit rate is -0.40%.

The European Central Bank stopped at the end of last year its policy of "quantitative expansion", which consists of buying funds with newly created money.

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

From a political point of view, this measure will be difficult, especially in Germany, where it has always been viewed with suspicion.

"Making money", as sometimes called this program, could lead to an increase in inflation and cause fears in Germany for this phenomenon, which hit the country hard in the first half of the 20th century.

What can the German government do?

Other tools for reactivating 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 time. The German government spends less than it collects in taxes, but does not want to use its finances to stimulate the economy.

The latest recommendations of the European Commission indicate that it is still necessary to apply "reasonable" policies that will ensure sustainability of the accounts of the governments of the Member States.

Some critics, on the other hand, believe that the rules of the European Union regarding the accounts of the Eurozone governments are too restrictive.

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