Eurozone slump looms larger
October 7, 2014
The drop in German industrial output was dramatic in August. Factories here produced almost 5 percent less than just two months ago. The strongest monthly decline since the 2009 economic crisis was only eclipsed by a 6-percent slump in industrial orders.
The contraction was most significant in the capital goods sector, including machinery and factory engineering, which is widely perceived as the growth engine of Germany. The German Economics Ministry seems just a little worried, calling the downturn a "phase of weakness" that was "aggravated" by the summer holidays, when entire factories closed for August.
German politicians' attempts to allay fears about the state of the economy, however, are sounding like the proverbial "whistling in the dark." The recent hard economic facts are not the only signs of a sluggish economy.
As the country's widely-watched Ifo Business Climate Index shows, the mood of German business leaders has also darkened in recent months, but it looks even worse for institutional investors and stock market analysts.
Even German consumers, who in the first half of this year propped up the economy with lavish spending, seemed to get the jitters. A relevant barometer compiled by market research group GfK has shown two consecutive months of falling willingness to spend.
The August hit taken by Germany's traditionally export-driven industry is partly the result of slowing global demand for German goods. Global crises, such as the conflict between Russia and Ukraine, including Western sanctions, as well as the fight against the Islamist terror in Syria and Iraq, forced the International Monetary Fund (IMF) to lower its growth estimate for 2014 on Tuesday . Emerging markets like China and Brazil are also struggling and will fail to drag the global economy out of its current state of sluggishness.
The main problem, however, has weighed on Germany for more than the past couple of months; growth in Europe continues to remain weak. Two thirds of German exports go to the European Union, notably the eurozone.
A silver lining for Europe?
The dire German figures are renewed proof that even Europe's largest economy cannot prosper without thriving economies in its European neighborhood. The earlier this dawns on German leaders, the better, because overcoming the European growth slump must at long last become their priority, too.
So far, however, Berlin's support for its partners in Europe has exhausted itself in political grandstanding about the German economic model and calls for stepping up savings and reform efforts. Attempts to adopt a collective approach based on pan-European solidarity have been opposed by German Chancellor Angela Merkel and her closest ally, Finance Minister Wolfgang Schäuble.
The pair has successfully silenced the eurozone discussion about issuing collective debt - the so-called eurobonds - which would spread the risk among all members of the currency area and thus lower borrowing costs. Moreover, Berlin continues to resist the introduction of an EU-wide deposit guarantee fund that would help the bloc's ailing banks.
Merkel's own crisis management, by contrast, has badly misfired. It has failed to lead Europe out of economic stagnation and has instead led the continent deeper into a quagmire of unemployment and social regression, as well as seen rising nationalist and rightwing movements.
Admittedly, it may be a distant hope that the current economic downturn in Germany will cause a rethink of crisis policies in Berlin. Nevertheless, it would be in Germany's best interest because it's only a matter of time before Chinese machine and equipment makers will have caught up with their German competitors. If Europe's economies are still languishing at rock bottom then, Germany is sure to experience a hard landing as well.