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.