German central bank warns country’s financial health not a given
By Howard Schneider,
Germany’s central bank warned on Monday that the country could be stressed by the region’s ongoing financial crisis, with signs of a slowdown accumulating in the euro zone’s largest economy even as it is being relied on ever more to prop up its neighbors.
“Confidence in German public finances is a key anchor of stability in the current crisis but it cannot be taken for granted,” the Bundesbank said in a monthly report that cautioned against what it called the potentially “unlimited” financial support being considered for troubled Italy and Spain.
The comments highlight the degree to which the success of the entire euro zone rests largely on the continued strength of a German economy that is looking vulnerable.
European leaders, many of whom set the euro crisis aside for the standard summer holiday, are to hold new rounds of talks this week over revised rescue plans for Greece, the possible need of a bailout for Spain, a restructuring of Europe’s banking system and a possible move by the European Central Bank to again begin buying the bonds of distressed nations.
Greece’s leaders need to decide on perhaps $15 billion in new cuts or other measures to meet the requirements of the latest international bailout program, which has slipped months behind schedule because of the country’s political stalemate and deepening recession. Spain’s leaders, meanwhile, urged the ECB to prepare a forceful new round of bond buying to ensure that their country and perhaps Italy are not locked out of markets, as happened with Greece, Ireland and Portugal.
“There can be no limit set,” Spanish Finance Minister Luis de Guindos said in a weekend interview aired on Spain’s EFE radio, according to wire service reports.
The proper role of the ECB has been a central part of Europe’s crisis debate and remains unresolved. Some, including the Obama administration, have argued for a broader role for the central bank, while others have argued that its mission, under the agreements establishing the euro, must remain more limited.
The Bundesbank has been among the conservative voices throughout the more-than-two-year-old crisis, typically arguing against efforts to centralize government debt and in favor of countries doing more to help themselves.
Along with those more philosophical concerns are increasingly substantial worries about growth in Germany — by far the region’s largest economy, the chief backer of the ECB and the chief financier for the regional bailout and other crisis programs.
Germany bounced back quickly from the 2008 economic crisis, and, with a wave of exports to fast-growing China and elsewhere, generated the fastest growth of the major industrialized economies — 3.6 percent in 2010 and 3.1 percent in 2011.
That has come to an end. Germany’s economy is expected to grow by just 1 percent this year, and the most recent data from the Eurostat statistical agency showed the country expanding just 0.3 percent from April through June.
While Monday’s central-bank report noted some particular strengths — consumers spending more after recent wage increases and a local construction industry buoyed by a round of new home construction and other building — there’s a growing sense of concern. Business confidence and investment are down. The number of new building permits continued growing for the first half of the year, but the value of orders to the construction industry fell, as did the number of people employed in the building trades, according to recent data from Germany’s federal statistics office.
Despite Germany’s record of fiscal prudence, its overall debt level is expected to rise this year — mostly because of its large, roughly 25 percent share of the various bailout programs set up to protect its neighbors.
Whereas more integrated economic unions, such as the United States, are judged as a whole, the euro zone is now no stronger than its main member. Even some pro-European voices in Germany are worried about the weight of the commitments the country is being asked to make. The second-largest country in the euro zone, France, is barely avoiding recession and faces its own economic and fiscal challenges.
“If you look to the near future, the German locomotive may run out of steam,” said Hans-Peter Keitel, president of the Federation of German Industries. “By the end of the year, we see a clear slowdown. If we talk about the possibility of bailing out neighbors, we should have that in mind. We are reaching the limits of our capabilities.”
That has not been reflected in Germany’s borrowing costs.
The country’s debt, as measured by the size of its economy, is “very high” in the view of the Bundesbank, at just over 80 percent, far higher than the 60 percent nations pledged to maintain when the euro was founded.
But like the United States, Japan and a handful of other countries, Germany has benefited from the so-far-unshakable belief that its government bonds represent a safe haven — so much so that the interest rate on shorter-term debt at points has been negative, meaning investors were paying the country to keep their money safe.