Shouldering the burden of Europe

Being one of the world’s biggest economies used to have its perks. G8 peers would laud your innovative private sector and Fortune 500s would seek out your technical expertise. University professors exemplified your model for social security and public spending. Perhaps best of all, you got to virtually dictate monetary policy to the world’s mightiest economic collective. Nowadays, it just feels like having a dozen kids in need of a trillion-dollar diaper change.

Germany is the fourth-largest economy on the planet by nominal GDP, according to the International Monetary Fund. Soon, it will effectively need to help prop up numbers 8 (Italy) and 12 (Spain), and a handful of others on that same list. The Piigs as they are collectively known — Portugal, Italy, Ireland, Greece and Spain — are teetering on the brink of public sector defaults. The acronym might have had an extra ‘I’, but thankfully Iceland isn’t part of the common currency — a fact that still failed to fully prevent it from wreaking havoc on the rest of Europe.

Story up until now

It’s a story of Piigs being devoured by bears. The presence of bulls for a good part of the decade protected their feeble anatomies — the accumulated fatty debt and lack of corresponding muscle. Germany is now a pitchfork-wielding farmer, trying to ward off the beasts.

Europe’s linchpin is already set to have a troublesome 2012 on the back of continental woes. A quartet of German economic research institutes recently downgraded their outlook for key indicators going into next year, Bloomberg reported last month. The IFO Institute in Munich, the IFW Institute in Kiel, the RWI Essen Institute, and the IW Halle Institute all agreed that Germany’s GDP growth will be a mere 0.8 per cent in 2012, down from a forecast of 2 per cent earlier this year.

The change in sentiment between then and now has been both highly palpable and precipitous. The year 2011 is set to record decent growth — at around 2.9 per cent. This comes despite the fact the economy stagnated in the second quarter of this year to 0.1 per cent growth. GDP performance for the wider Eurozone is expected at 1.4 per cent for the current year, falling to 0.4 per cent in 2012, according to the same research syndicate. This is bad news for Germany — the world’s second-largest exporter of goods — as the surrounding continent is also the largest consumer of German goods.
For some perspective on the significance of Germany’s exports, it is pertinent to note that manufacturing accounts for nearly a third of GDP and employs a third of the country’s workers. Driven by revered firms such as BMW, Mercedes-Benz and Porsche, Germany is the world’s largest exporter of automobiles.

Agriculture, though only contributing about 1 per cent of GDP last year, still boasts the third largest production output in the EU (behind France and Italy). Most of the agricultural produce is consumed locally however, insulating the sector from falling trade. Services is the largest chunk of Germany’s economy by a long way. It accounts for over 70 per cent of GDP and employs a similar proportion of the workforce. Bear in mind German expertise is also exported; the highly skilled are also slaves to globalisation. By the end of this year, exports are projected to grow by more than 1 per cent over the larger economy – it is an understatement to say that Germany relies on its exports.

Reason for optimism

When the sub-prime mortgage crisis found its way to Europe a few years ago, Germany was one of the hardest hit. In 2009 the economy shrank 5 per cent. If one can draw parallels between this crisis and the recession, then perhaps there is reason for optimism in the medium term. Only 12 months after that catastrophic year, the economy grew by 3.7 per cent in 2010. There is supplementary good news to boot. Forecasts predict unemployment to fall by a little less than 7 per cent over the next year, with 150,000 people presumably finding work. Inflation is set to ease from 2.3 per cent to 1.8 per cent next year as global commodities markets simmer.

Germany is also leading by example — in preaching fiscal discipline to beleaguered euro-counterparts, it has put its money where its mouth is with a budget deficit of 0.9 per cent of GDP this year, expected to fall by a third going into next.

Speaking of which, Greece, Europe’s quintessential problem child, is all set to miss budgetary targets this year. Germany has had to reassess strategy over and over again since Greek ailments were first brought to light. The initial bailout package may have looked very different had the EU known that Portugal and Ireland were on the same path. Member states are reluctant to offer sovereign guarantees for fear of endangering individual credit ratings.

Conflicting interests

Last month, when Belgian bank Dexia needed help again, a balancing act of sorts was born. Is it necessary to prioritise a government or financial industry? The French insisted on a bailout from the new European Financial Stability Facility. German Chancellor Angela Merkel was of the opinion that it is the responsibility of the government to ensure the survival of a local banking sector, and did not want Germany to get its hands dirty bailing out a (part French) Belgian bank. With so many conflicting interests to protect and with new debilitating events springing up every now and then, a problem of consistency has emerged.

Germany doesn’t want the dissolution of the common currency, nor does it want a shared budget with the EU. Though this has been made clear in policy, Europhiles in Germany, finance minister included, have flirted with this idea. As a salvage plan for the Eurozone continues to evolve, Germany is torn between saving its brainchild and making sure it isn’t dragged under as well.

An eventual metamorphosis of Europe into US-style states is even touted as a long-term (albeit fanciful) solution. Perhaps it’s time the Germans pay attention to such a radical avenue. During the same period that the US historically had its credit rating downgraded and Republican squabbling looked to bring down the entire system, the S&P 500 still happened to outperform the DAX by leaps and bounds. This was when the worst was yet to come for Europe, and even today, may still lie ahead.