German meltdown

While most people I know have been understandably fixated on the continuing slide of the American economy, Germany is also going down the drain. What’s remarkable about this, at a time when recession is the norm in most so-called advanced economies, is the absolute complacency of German politicians.

Eurointelligence is my go-to site for what’s going on. This morning two of its posts are particularly startling. First, they point to a great scoop from the Frankfurter Allgemeine Zeitung. An internal memo from the German economics ministry reveals an expectation of -3% growth next year, the worst performance in the post-war period. The reaction from the ministry?

When confronted with those data, the government spokesman presented his usual complacent interpretation. One should not overestimate those figures, he said, given the lack of experience of this type of crisis. The newspaper said there will be a new stimulus, but the focus will be on infrastructure investment (meaning not in time for 2009). Der Spiegel quotes a member of the government who said that the next programme would have a size of at least €20bn, which is less than 1% of GDP.

Wolfgang Münchau, who runs Eurointelligence, then weighs in with a magisterial debagging of German finance minister Peer Steinbrück and chancellor Angela Merkel.

Over the past three years, I have closely followed the German finance minister with a growing sense of disbelief. Peer Steinbrück’s lack of diplomacy is remarkable only insofar as that it has now become known to a wider audience. He has been talking like this forever. His bashing of the “Anglo-Saxons” goes down very well in Germany for now. But at the time of the general elections in September 2009, Germany and the rest of the eurozone will be in the middle of an economic depression. Then people will be asking why their chancellor and their finance minister have been so extraordinarily complacent.

Given the extreme economic deterioration in the past few weeks, I actually expected they would have done something by now. But they are digging in. Angela Merkel, the chancellor, held a domestic summit in Berlin to discuss the economic situation. I suspect another stimulus package will come eventually, sometime next year. But I doubt it will come in time to help the economy in 2009. Whatever is eventually decided will have no economic effect until well after the elections. Germany is thus entering 2009 with a total stimulus of 0.5 per cent of gross domestic product, in other words, with essentially no fiscal support. Since monetary policy has little traction when credit markets are dysfunctional, there is hardly any support at all.

Two weeks ago, I forecast that the German economy would contract between 2 and 4 per cent in 2009. What looked to some like an eccentric forecast has now become mainstream. Last week, two of Germany’s large economic institutes forecast a decline in growth for 2009 of 2 and 2.2 per cent respectively. Norbert Walter, chief economist of Deutsche Bank, said a contraction of 4 per cent in 2009 was possible. The Ifo institute predicts that the contraction will continue in 2010.

Expect all those forecasts to get progressively worse throughout the winter, especially if global trade continues to contract at current rates. Germany ran a current account surplus of 7.6 per cent of gross domestic product in 2007. This means that a global trade crisis will hit Germany disproportionately hard. Last week’s most shocking economic news was the 2.2 per cent year-on-year fall in Chinese exports in November, which is a bellwether of global trade volumes. To make matters even worse, the real effective exchange rate of the euro is beginning to rise again.

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