What If Germany Gets Bogged Down Too? Or Has It Already?

All hopes rest on Germany: its vibrant economy teeming with globalized, ultra-competitive, export-focused companies would drag France and other Eurozone countries out of their economic morass. But then, there’s reality.

That France with its double-digit unemployment fiasco is losing its grip was hammered home by the Purchasing Managers Index. After three months of false-hope upticks, it crashed to a low not seen since March 2009, the trough of the financial crisis! Business activity has been skidding for 18 months, and new orders, a precursor for future activity, for 19 months. The French private sector is in a heap of trouble.

On the other side of the Rhine, Germany is still bathing in optimism—though its economic output dropped 0.6% in the fourth quarter (henceforth called the awful GDP surprise), on par with the struggling Eurozone, which has now spent five quarters in the red. But France saw a much milder 0.3% decline. While France’s decline has been ascribed to structural issues, fixable only through a slew of reforms and adjustments that would tighten the belts around its people until they squeal, Germany’s much steeper decline was considered “temporary.” It would go away on its own.

Evidence of that chasm in perception: the Purchasing Managers Index. It was still in positive territory for Germany though it had dropped from January. While service orders stagnated, manufacturing orders ticked up. The “sharp rebound” in export business was attributed to higher demand from Asia. If only China would continue to pull through!

Alas, Germany’s most important trading partner isn’t China. Nor the US. It’s France. It mops up about 10% of Germany’s exports. And it’s not just cars and monstrous hardware. Germany exported, to name a delicious example, 645,000 metric tons of chocolate for €2.7 billion during the first eleven months of 2012, up 5.7% from prior year. The most important target country? France! It took 13.4% of it.

Seeing France keel over, German exporters were desperately trying to increase their sales in Asia. And they were investing in China like madmen. It worked last year. Exports of goods hit a record €1.097 trillion, up 3.4% from 2011. But the awful GDP surprise had a few even nastier details: exports in the fourth quarter actually declined by 2% from the third quarter. And investment by businesses plunged 9.3% from prior year. They were investing in China instead—because for them, that’s where the future was, not in the economically decrepit Eurozone.

Now this: in 2012, Germany achieved something rarely seen anywhere in the world, and if it’s espied at all, it’s there only briefly, mirage-like: a budget surplus. It wasn’t much, €4.2 billion. The first surplus in five years, the third since Reunification. While the federal government and the states (Länder) still ran up deficits, the surplus of the communities and the social security system more than made up for it. Anytime a government gets anywhere near a budget surplus, it deserves a round of applause. Then, after the noise dies down, we can quibble over how it got there, if it got there at all, or if it was a figment of governmental accounting imagination, and why it had to extract that much in taxes from its strung-out taxpayers.

Given that extraction of taxes, private consumption—another detail in the awful GDP surprise—increased by a measly 0.6% in 2012. But consumption by the government, flush with record tax revenues, increased by 1.4%. It got worse towards the end of the year: December retail sales saw a brutal plunge of 4.7%. January retail sales weren’t available yet, but January vehicles sales were….

Total vehicle sales plummeted 9.3% from January last year. An equal opportunity fiasco. Passenger car sales tumbled 8.6%. The biggest losers of what Germans consider German brands: Ford swooned 32.2% and VW, the megastar that could do no wrong, skidded 13.3%. Among foreign brands, Lexus suffered a dizzying 62.8% dive. It’s tough in Germany these days. And an indicator of how businesses viewed the future in Germany, sales of light, medium, and heavy trucks fell by 14.6% and tractors by 23%. There wasn’t a scintilla of good news in this report.

This is the economic engine of Europe, the country that is expected to pull Europe out of its funk. Sure, things could turn around on a dime. China and other Asian countries could unleash a tsunami of orders. France could suddenly rebound. Miracles happened before. And this could be one of them.

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