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German Economy Resilient in Face of Euro Crisis

Exports to countries outside the euro zone help its paymaster weather the area’s doldrums, so far at least.

The German economy remains stubbornly resilient just over a year after the eruption of the euro zone crisis, according to numbers published on Tuesday that show it still happily decoupled from most of the rest of the currency union. 

German gross domestic product (GDP) grew by 0.3 percent in the second quarter, according to official EU figures. This was slightly above consensus expectations immediately before publication. More strikingly, it was considerably better than many economists had predicted a few months ago, when conventional wisdom held that the German economy would inevitably be pulled down by the sharp decline in much of the remainder of the currency union. Tuesday’s figures showed that Spanish GDP fell by 0.4 percent during the same period, with Italian output plummeting by 0.7 percent and Portugal sliding by 1.2 percent. Euro zone output as a whole inched down by 0.2 percent.

The bedrock of Germany’s strong performance has been its strong employment market. At 5.4 percent, its unemployment rate is close to its lowest point since German reunification in 1990. This has kept consumer confidence steady — it edged up in August according to GfK, the market research group, which credited “the stable employment situation” and “resultant income increases.”

German unemployment has been lowered by structural reforms, including a tightening of the conditions for out-of-work welfare benefits and the spread of flexible working agreements agreed between employers and labor unions. Stricter benefit conditions have reduced unemployment by forcing jobless people to seek work more actively than before. Flexible working, such as agreeing to vary one’s hours to adjust to fluctuations in demand at factories, has increased employers’ incentive to hire workers, since they can be used with greater efficiency. Critics say these changes have reduced employees’ power to earn decent wages, partly by intensifying the competition for jobs and partly by creating a new tier of workers who are under more pressure than before to accept low-paid, casual work. However, by increasing the supply of labor and matching it more closely to employers’ needs, these changes have allowed the German economy to expand for longer before labor shortages choke off growth. Higher employment has also boosted household consumption. 

The German economy is also supported by strong export numbers, which suggest that Germany remains much less dependent on the euro zone economy than many other member states.

Exports are worth about 50 percent of German GDP, according to the World Bank — a high number for a country of Germany’s large size. It is also much higher than Spain’s corresponding figure of 30 percent, Italy's at 29 percent and Greece's at only 24 percent in 2011: an extremely low number for a country of Greece’s size, though the proportion is likely to have risen this year for the negative reason that Greece’s domestic economy is shrinking so much.

The makeup of German exports is also benign, given the euro zone crisis. Only 39 percent are sold within the euro zone, according to its national statistical office — compared with about 50 percent for Spain. As a result, although exports to euro zone member states fell 1.1 percent year-over-year in the first half of 2012, rises in exports to the rest of the world pushed the total tally up by 4.8 percent — given an extra competitive edge by the 5 percent fall in the euro since the beginning of the year to $1.23 at the close of European trading on Tuesday.

Some economists have reacted to the continuing positive news from Germany by naysaying predictions of eventual German decline.

“These numbers continue to paint an all-too-predictable picture of growth in Europe, with expansion in Germany driven by exports and consumption, growth in France stagnating and deep recessions continuing in southern Europe”, said James Nixon, European economist at Société Générale in London. “Moreover, there seems little to suggest that this pattern will change, and our initial forecast would be for exactly the same performance to be repeated for the rest of this year.”

Tuesday’s numbers showed French GDP unchanged on the previous quarter — defying consensus predictions of a slight decline.

The sunnier economic outlook for Germany has been reflected in its equity market. The DAX index is up 16.3 percent on the year at 6,974, including a 0.9 percent rise on Tuesday in reaction to the positive output news. By contrast, Spain’s IBEX 35 index, whose companies are dependent on its poorly performing internal economy, is down 17.6 percent on the year at 7,125.

However, the view that the German economy will continue to grow is still far from the consensus. Economists say German output is still affected by the euro zone. A 0.3 percent quarter-over-quarter rise is below the long-term average, and down from 0.5 percent in the first quarter and its average over the past year, compared with typical rates of 2 percent or so before the credit crunch. If the euro zone crisis became more severe still, it would be difficult for exports from the rest of the world to compensate for a likely sharp slide in those sold within the currency union.

Moreover, Tuesday’s survey of European fund managers by Bank of America Merrill Lynch — carried out earlier this month, in the days after the most recent European Central Bank interest rate meeting — showed that a net 32 percent saw Germany as more likely to spring a negative rather than positive surprise this year. Even those analysts who are relatively optimistic about Germany acknowledge that the need to bail out one or more large euro zone member states could prompt a debt crisis in the country, since it has become, by default, the union’s principal paymaster.

Among European countries, only Ireland was seen as more likely to present a positive surprise — by a hefty net 39 percent of fund managers. Ireland is one of the few euro zone nations less reliant than Germany on generating growth through euro zone demand: Its highly export-focused economy is heavily reliant on the U.S. and U.K. The cases of Germany and Ireland confirm that although there are 17 members of the euro zone, some of them are more dependent on it than others for their prosperity.

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