At first blush, the German economy appears to be ailing – at first blush because the stock market, in its omniscient manner, is predicting wondrous developments as it hop-scotches from one all-time high to the next. This relentless optimism has morphed into a breeding ground for projections into outright magnificence. But inconvenient data is getting in the way.
Consulting firm McKinsey, in an exclusive study for Manager Magazin, predicted 2.1% annual economic growth until 2025, a period the report called the “Golden Twenties.” Germany would rack up 80% more exports and create millions of jobs. “The Federal Republic stands before a second Economic Miracle,” Manager Magazin summarized it, the first one having been the multi-decade rise from the ashes after World War II.
There were some ifs and buts in the report. The biggest one: the euro would have to be saved at all cost. So the report proposes a public investment fund that would suck up €20 billion per year from taxpayers in northern Europe – €10 billion a year from those in Germany. It would form the foundation for a €140 billion-a-year investment stream into the Eurozone periphery, a slick transfer from taxpayers to corporations, bypassing governments and their shenanigans altogether, leaving behind austerity disputes, alphabet-soup bailout funds, and stubborn sovereignty-transfer issues. And it wouldn’t be polluted by votes or parliamentary procedures.
Jörg Asmussen, member of the executive board of the ECB and ex-Deputy Finance Minister of Germany, was roped in to endorse the idea. He liked it but added that the additional pot of subsidies alone would hardly be enough for the euro to make it to 2025. “The Eurozone cannot function the way it has been conceptualized,” he admitted. “That’s why we have to systematically develop it further over the next few years.” Hence total integration. The Banking Union would just be the next step, he said.
And so the McKinsey study and Asmussen agreed: total Eurozone integration would be required for the euro to make it; and the euro would be required for Germany to reach the “Golden Twenties” and experience a second Economic Miracle.
Reality is even less rosy. First quarter GDP rose an imperceptible 0.1% from the fourth quarter of 2012, when it had swooned by 0.7%. The lousiness of both quarters surprisingly surprised the pundits, who’d been drinking too much of their own Kool-Aid. Compared to the first quarter of 2012, the economy contracted 1.4%.
They blamed Easter that had wandered into the first quarter, dragging some vacation days along with it. They blamed the winter weather – though in effect, winter weather is a normal occurrence in Germany’s first quarter. And they blamed the leap day in 2012, which gave February an extra day. By now, I can’t remember the excuses for the “surprising” fourth-quarter debacle.
Beyond excuses, there was a reason: while household spending, which had collapsed in December, revived a little, and while the drop in exports was roughly neutralized by a drop in imports, investments, as they’d done in all of 2012, skidded downhill. It had nothing to do with Easter or the weather. It was an ongoing corporate phenomenon: retrenching.
Companies had their reasons: the 30 largest companies in the DAX stock index reported a combined €308.4 billion in first-quarter revenues, down 0.8% from last year – the first revenue decline since the fourth quarter 2009. Another one of those data points with parallels to the financial crisis.
Despite ceaseless emphasis on operating efficiencies and cost cutting, combined operating profits fell 3%. There were some winners, such as E.ON, the world largest non-state-owned utility, and insurer Allianz. But the biggest revenue sinners were the automakers, an industry that has been clobbered half to death in Europe. Daimler, BMW, VW, and tire maker Continental combined surrendered 4% in revenues; their operating profit plunged 26%. Only the booming auto market in China and growth in the US had prevented an outright fiasco.
The report blamed the debt crisis that was worming itself into the income statements of Germany’s corporate crown jewels – for the first time, they could no longer “decouple” from it, explained Ernst & Young Partner Thomas Harms. Because of high unemployment in Eurozone periphery countries, governmental austerity measures, and corporate unwillingness to invest, a recovery appeared very unlikely, he said. Some parts of Europe were still in a downward spiral, and an “end of the crisis is still not in view, let alone a significant upturn.”
Unperturbed, German stocks closed at yet another all-time high. Bubble mentality has set in, focused on central-bank money-printing and asset-buying binges around the world. While they have produced, at best, dubious economic benefits, they have accomplished a fascinating, almost psychedelic feat: overpowering the bad breath of reality and allowing stock markets to float weightlessly in a dream world. At least temporarily.
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