European financial crisis: Germany shows signs of slowdown

Germany’s robust economy is showing signs of a slowdown, raising fears that the linchpin holding together Europe’s fragile financial health could be weakening.

On Tuesday, the country revealed that its exports in June rose by only 3.1 percent, compared with a 20.1 percent increase in May, marking the smallest increase in 16 months. A few days earlier, an index of German manufacturing activity dropped from 54.6 in June to 52 in July — the lowest level since October 2009, marking the third consecutive month of declines.

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Aug. 8 (Bloomberg) -- Nick Kounis, head of macroeconomic research at ABN Amro NV, talks about the prospect of a political solution to the European sovereign debt crisis. He speaks from Amsterdam with Andrea Catherwood on Bloomberg Television's \

Aug. 8 (Bloomberg) -- Nick Kounis, head of macroeconomic research at ABN Amro NV, talks about the prospect of a political solution to the European sovereign debt crisis. He speaks from Amsterdam with Andrea Catherwood on Bloomberg Television's "Last Word." (Source: Bloomberg)

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“The fact that [the German economy is] showing signs of faltering and sources of domestic demand aren’t manifesting themselves — people are worried,” said Tu Packard, a senior analyst for Moody’s Analytics.

Germany has built its economic strength on exports to China and other developing countries. As the global slowdown reduces demand in those economies, Germany could pay the price.

“They’ve managed to protect themselves so far, but what happens when the crisis hits China’s economy? China depends on the U.S.,” said Henry Farrell, a political science professor at George Washington University.

And if Germany’s domestic growth declines at the same time that its exports slow, the double whammy will be felt across the euro zone, which relies on German economic strength to bolster troubled members such as Greece and Portugal.

Markets have begun bracing for any German stumble. On Tuesday, for instance, the price of Germany’s credit-default swaps — a type of insurance against financial risk — exceeded those of the United Kingdom for the first time since January 2008. And although many leading European stocks rebounded on Tuesday after days of record drops, the German DAX declined by 0.1 percent.

The worse the economic outlook for Germany, the more difficult it may be for the German Parliament to agree to provide critical financial support to European Union countries in crisis. German Chancellor Angela Merkel has struggled to balance the need to contain the escalating debt crisis across Europe with tremendous resistance from German politicians and taxpayers who resent bailing out distressed countries they think have acted irresponsibly.

So far, Germany’s conflicted position has slowed efforts by the European Central Bank to address the region’s financial crisis. European market watchers are modestly hopeful that the ECB’s recent move to buy Spanish and Italian bonds could help prevent the contagion of debt problems from spreading.

Both Merkel and French President Nicolas Sarkozy, who has faced similar political resistance at home, publicly affirmed their support for the bond purchase. “France and Germany are confident that the ECB analysis will provide the appropriate basis for secondary-market interventions as it will help determine the case when financial stability of the euro zone as a whole is at risk,” they said in a joint statement this week.

And if the euro-zone crisis continues to spread, Germans themselves may decide that the economic risks of inaction outstrip the cost of playing such an outsize role in saving the euro. While Germany’s economic growth has been more dependent on Asia than on its neighbors, confidence in its economy has become intertwined with the rest of the euro zone.

“German banks have been lending heavily to at-risk countries. If you let other parts of the euro zone go down the tubes, you go down the tubes as well,” says Moody’s Packard. “The price of maintaining the euro zone is very high — much higher than people want to pay. But the price of not maintaining it might be higher.”

 
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