independent

Saturday 19 April 2014

David McWilliams: We'll all shiver if Germany can't shake economic cold

IF you want to know where the classic 1980s power ballads (the theme from 'Dirty Dancing', Laura Branigan's 'Self Control', Heaven 17 numbers and assorted gems from the New Romantic era) ended up, look no further than German radio. While I was driving through the northern bit of the Rhine yesterday, the car radio offered up an eclectic mix, ranging from the reasonably nostalgic to the God-awful, in a display of Catholic music tastes befitting a journey that concluded just outside Cologne cathedral, Europe's biggest.

The other noticeable thing about driving in Germany on a weekday is the sheer amount of commerce on the roads. The inside lane of the autobahn is an uninterrupted convoy of trucks shipping Germany's exports all over the continent.

If you want to feel the German economy, the best way is to sense the shudder of the thousands of trucks on the A3 autobahn, which bisects Germany top to bottom.

But commerce and trade don't end there. In front of the cathedral last night, the Rhine was a scene of controlled industry as dozens of barges plied their way up and down this beautiful river. The melodious repetition of the giant diesel engines -- thud, thud, thud, thud -- might be a soundtrack that some of Germany's more excitable radio DJs could do with taking time to listen to, given the cacophony to which they subject the average driver.

But listening to the local radio gives you a sense of what the producers deem to be news. Yesterday it was all economics; Greece, the differing internal German political views on the euro and the best way forward.

The biggest news -- and this is what is setting the political tone here -- is that business sentiment fell for the fourth successive month in Germany.

There is a real sense that the assumption that the European crisis would stop at the Rhine, the Roman Empire's natural boundary with Germany, dividing the Latins from the Teutons, is now in shreds.

The five-year crisis in the eurozone has been the story of slow but progressive contagion as one economy after the other weakened and orders dried up, affecting more and more suppliers until they ultimately affected Europe's biggest supplier, Germany.

Worse still from a German perspective, the historically low interest rates which were designed to kick-start demand in the periphery have only served to drive up things like property prices in Germany, threatening to inflict upon Germany the very virus that floored some of the peripheral countries in the first place.

First, there was a banking crisis in Ireland and a government crisis in Greece; then Portugal got sucked in; then the contagion spread to Spain and its consumer bubble deflated rather too quickly for its bankers' tastes as some of the banks were exposed as little more than ponzi-scheme operators. Then Italy began to grind to a halt, led by consumers who stopped spending.

The assumption at this stage was that Europe's prudent core countries would be okay, but then France started to slow down and ultimately its biggest trading partner, just over the Rhine, felt a chill. But Germany hasn't been able to shrug off that chill. In fact, it is feeling progressively worse.

The question we should now be asking, one which seemed utterly implausible a few months ago, is whether Germany is heading not for a slowdown, but for a recession?

And if it is, what would a recession in Germany do to the tolerance of the German people for more European bailouts?

Hans-Werner Sinn, president of the Ifo Institute -- one of the most accurate German economic think tanks -- said export expectations were slightly negative for the first time in almost three years.

"The German economy continues to falter," he said.

Last week, we had a fascinating piece of research from GaveKal -- an influential Hong Kong-based think tank -- which suggested that a recession in Germany was on the cards, very much so.

Despite the fact that the highways and byways of Germany are still choca with commercial traffic, something very familiar to those of us in the rest of Europe is happening; the recession is moving in waves and no one country has sufficient economic levies to hold back the tide. For Germany, we have the added, non-European problem of a sharp drop in Chinese demand for machines. This affects Germany's heavy-industrial export sector disproportionately.

Looking at survey data, export data and output data, as well as assessing the prospects of the countries to which Germany exports, and taking into account the fact that Germany itself is a huge importer too, the authors of the GaveKal report conclude: "There can be no escaping the fact that reduced German imports must cause a decline in French and Italian exports. This will likely be a shock for those who expect the German juggernaut to drag the southern economies back to growth. To put it bluntly, Germany will very shortly be subtracting from growth in the rest of Europe."

Because Italy and France are not competitive against Germany, a slowdown in Germany will, as it always does, expose the least competitive first, impacting on Italian and French producers.

If the authors are even half-right, this puts huge question marks over the entire EU's strategy with regard to the euro crisis. Up to now, there has been a sense that ultimately, if everything goes pear-shaped, Germany will pay.

BUT what happens if Germany can't pay because it is in a recession? Then all bets are off and it is the slowdown and, more acutely, the encroaching recession that might explain the hard-line stance of Germany and France with the Greek prime minister last weekend when they said that Greece had run out of road.

We should not gloat over the Greeks' dilemma, because if Germany's industrial muscle atrophies, we are next in line.

We, more than any other country, are dependent on the willingness of the Germans to dig deep for Ireland at this stage. Up to now our negotiating tactic has been based on the "Germans will pay" dictum.

Strolling along the side of the great river last night, listening to the thud, thud of the giant barges, the idea that a weakened Germany would remain ever willing to dance to someone else's tune seems, at best, fanciful.

www.davidmcwilliams.ie

Irish Independent

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