Confidence in Germany Continues to Slide

Those watching for just one piece of good news about economies in the European Union have been disappointed again. The Ifo Business Climate Index for industry and trade in Germany fell to 102.3 from a July reading of 103.3 in August as private sector concerns continued in the region’s largest economy by far. Germany remains the key to financial support for the balance of the region. The support within Germany for that support almost certainly has been harmed by those citizens and politicians who believe gross domestic product may go negative in the current half of the year.

Ifo analysts reported:

The current business situation deteriorated only slightly, but companies expressed greater pessimism regarding future business developments. The German economy continues to falter.

Both the manufacturing and services sectors continue to struggle, the research shows. The dip was more than most economists expected.

It is no accident or coincidence that Chancellor Angela Merkel has had to combat negative comments about Greece by members of her own coalition. Alexander Dobrindt, the general secretary of the Bavarian Christian Social Union, said that Greece would not be member of the euro next year. And Bundesbank President Jens Weidmann, over whom Merkel has little control, criticized plans by the European Central Bank to buy the bonds of the region’s weakest nations to keep their borrowing costs down. “In democracies, parliaments, not central banks, should decide about such comprehensive sharing of risks,” Weidmann told German weekly magazine Der Spiegel.

Merkel’s position on EU rescue packages and the establishment of a permanent bailout fund for the region have started to be balanced against her chances of remaining chancellor of Germany beyond next year’s elections. Those chances get longer each time a member of her own coalition speaks out against putting more money into nations like Greece and perhaps Spain in the decade-old union. And the problem continues to worsen as economists and bankers question whether the departure of the weakest members will do any serious damage to those that remain — and to their major banks that hold bonds in some of the troubled countries.

As the Germany economy weakens, so does Merkel’s hand.

Douglas A. McIntyre