Even Germany Gets Caught in Europe’s Downdraft

The Germany economy is so strong that it might have avoided the downdraft created by the trouble in Europe. Its export levels have been strong enough and its consumer activity robust enough that these two things might have carried it through difficult times. But it has not turned out that way. Early data from Germany’s Federal Statistics Office indicate GDP dropped by 0.25% in the fourth quarter. As data are measured, it would only take one more poor quarter for Germany to officially be in a recession. The news will affect Germany’s ability to participate in the bailout of its weaker neighbors.

The ruling government of Angela Merkel has been under continuous pressure to moderate its participation as the main savior of Spain, Italy and Greece. Her resolve has been tested by the German parliament more than once. A widely followed opinion poll in September showed that as many as two-thirds of Germans were opposed to increased investment to solve the eurozone’s problems

The threat of a recession will further galvanize the reluctance of German taxpayers and politicians to allow German money to go to nations like Greece. Most international capital market investors already believe Greece is doomed to default. Any capital given to the southern European nation essentially would be lost then. It is less likely that the same problem would occur in Italy or Spain. But rating service Fitch recently said Italy is the single greatest risk to the euro. Germany, the financial pillar of the region, needs to consider that nations with inadequate austerity measures, high debt, runaway unemployment and low tax receipts will require more billions of euros to sustain them than is forecast now.

A German recession probably means a deeper recession throughout the rest of Europe. Germany is supposed to be the region’s banker, but what happens when that bank is in trouble?

Douglas A. McIntyre