The German Economy Caves, And Eurozone Bailouts Take On New Dimensions

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Last year, German exports rode to a new record, jobs were being created in massive numbers, real wages rose, housing and real estate boomed, the federal budget was nearly balanced, and consumers felt good and spent money. There were moments in 2012 that made people dream of a repeat performance—despite the havoc that the Eurozone debt crisis has been wreaking.

Whatever was happening, Germany would be able to make up for declining exports to the Eurozone with strong exports to Asia and the US. Internal demand would remain solid. And this illusion of durable economic strength and fiscal virtue has tainted the discussion about saving the euro, bailing out debt-sinner countries in return for austerity measures, and keeping the European Central Bank in check.

But now the crisis has moved from Germany’s front yard to its doorstep and is about to enter its living room. Beer sales, for example. That the German Federal Statistical Office tracks them shows just how crucial a staple beer is. Alas, beer sales to customers in Germany dropped 2.3% in the first half over the same period last year, and ominously, exports dropped 2.9%.

Auto sales got clobbered in July, dropping by 5% from July last year, and by 16.5% from June, knocking year-to-date sales, which had been holding up well, into the red (-0.1%). Auto sales have been a fiasco in the Eurozone for a while. In Greece, where they’d been plummeting for years, they plummeted again in the first half, by 41.3%! In Italy, by 19.7%, in France by 14.4%, in Belgium by 12.7%. But until July, Germany had been spared. No more. Of the big brands, only Audi (Volkswagen) was up (+14.3%). The others got hammered: Opel (GM) -18.6%, BMW, Mini -17.9 %, Mercedes -14.6 %, and Ford -4.4%. Even VW, market-share leader and on a phenomenal worldwide roll, was down 1.5%.

Retail sales, which had also been doing very well, stalled. And the closely watched Ifo index for July deteriorated so sharply that Hans-Werner Sinn, President of the Ifo Institute, admitted, “The euro crisis is having an increasingly negative impact on the German economy.”

Germany’s manufacturing industry is now in a rout. Output and new orders dove in July at a rate not seen since April 2009, the depth of the great recession. It was the 4th month in a row of lower production volumes, and the 13th months in a row (!) of declining new orders—a terror for future production. The overall PMI index crashed to the lowest level since June 2009. Exports were hardest hit, particularly to Western Europe, Asia, and the US, the three largest markets in the world! The decline in exports was steepest since May 2009. And there is talk of “job shedding.”

These trends are reminiscent of the financial crisis when export orders fell off a cliff, causing GDP to plunge 2.1% in the fourth quarter of 2008 and 3.8% in the first quarter of 2009. Annualized, those two quarters amounted to a horrid double-digit decline in GDP—the worst two quarters in the history of the Federal Republic. The German economy lives and dies by its exports.

Yet my contacts in Germany remain “relaxed.” There’s no malaise or panic. “In the countryside, everything goes on regardless,” wrote one of them. Restaurants are doing well. People have jobs, wages are going up. Inflation has backed off. The recent feeling of optimism, after years of pessimism, is still hanging in the air. People are bidding up rental properties and plowing their savings into brick and mortar. Well-educated Greeks and Spaniards are heading to Germany in search of work. For them, it’s nirvana. The German government, through various organizations, is trying to rope in its expats in Silicon Valley and lure them back with special incentives to fill the shortage of qualified talent at home. Clearly, the numbers I mentioned haven’t yet made their way into the perception of day-to-day reality.

The public debate about bailing out Spain or Greece, and about Draghi’s plan to go on a bond-buying binge, is taking place to the backdrop of a sweetly humming economy. But the ear-piercing screech of the German export machinery as it shifts gears will change the debate—and the political will. German exporters, a super-powerful lobby, will push for all-out “do-whatever-it-takes” flooding of the Eurozone with money. On the other hand, if prospects of layoffs or forced part-time work (Kurzarbeit) are hounding consumers, their appetite for bailing out southern countries will fade altogether—and so will Germany’s ability to do so.

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  1 comment for “The German Economy Caves, And Eurozone Bailouts Take On New Dimensions

  1. Wolf Richter
    Aug 7, 2012 at 5:07 pm

    Thanks, Chriss. This whole mess and the machinations it produces continue to baffle and fascinate me. While the Germans are struggling with it publicly, the French appear to mostly brush it off. But one day, they too will wake up.

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