One word is rearing its ugly head again across the Atlantic in Europe: crisis. Portugal’s debt situation and Greece’s ongoing economic weakness are threatening Europe’s relative stability of the past year. The nations on the periphery are a far cry from fiscally conservative powerhouse Germany, but will the region’s strongest economy — and its investors — be affected as well by the continent’s economic troubles? In a new report titled ‘The end of the German miracle?’ Societe Generale (SG) highlighted the economic challenges faced by Germany.

Germany:  Economy Slowing Down

Faced with the emerging market slowdown and recession in southern Europe, the German success story could be at risk in the near future. The manufacturing PMI, which fell to 48.6 in June, highlights the struggle of the German economy, which is  expected  to  grow  by  only  0.3 percent  in  2013  (Bundesbank). While  Germany  cannot  do  much  to  support  emerging markets,  it  could  have  a  direct  impact  on  the  Eurozone’s economic  prospects.  In  this  respect,  Chancellor  Merkel recently  decided  to  move  ahead  on  key  subjects,  such  as youth unemployment (Europe earmarked €6bn last week), or the increase of credit to small and mid-sized companies, with the  help  of  the  European  Investment  Bank.  So, progress  is being made, albeit not very quickly as illustrated by the slow progress on the banking union.


Pending the German Elections

According to recent polls, Mrs. Merkel has a good chance of re-election, but the major uncertainty is over what kind of coalition she might form  Forecasts  from  ElectionScope (a specialist in analysing political elections, see table below)  show  that  the current coalition (CDU/CSU – FDP) may not gain an absolute majority,  and  a  grand  coalition  is  a  possible  outcome.  After the September elections, the newly-elected coalition will have two choices: either it maintains its previous policy of the past three years, or it succeeds in convincing European leaders to commit  to  greater  European  integration.  Since  the  2009 German  elections,  the  current  coalition  has  not  undertaken any  large  scale  reforms.  Although  still  well  ahead  of  the European  periphery,  Germany  also  needs  to  implement structural reforms to address its economic challenges.


Germany: Elections May Trigger Change if Countries Compromise on Key Issues

Germany is facing fierce competition worldwide. Its economy represented only 4.1 percent of world GDP in 2018, down from 6.5 percent in 2003. As for the euro area, its share of world GDP will fall below 15 percent, behind China. In Germany, the growth model is changing, as the country is raising wages and reducing its trade  surplus  with  the  Eurozone,  while  it  faces  a  major challenge  with  its  demographics.  All  European  countries would  benefit  from  more  Eurozone  integration.  But,  this  will only materialize if the largest countries accept to compromise on  key  issues,  namely  retirement  reform,  labour  market flexibility and fiscal union (in exchange for Eurobonds). If such compromises  can  be  reached,  it  could  significantly  improve Eurozone prospects and would be seen as a game changer for  financial  markets.  But  if  Eurozone  leaders  fail  to cooperate, the German economic model may be at risk.