Germany's Economic Slump
By Stratfor
Germany’s Bundesbank announced Monday that the recession in 2009 will likely “intensify further” than the 2.1 percent decline in gross domestic product (GDP) recorded in the fourth quarter of 2008. The government also said it was preparing a decentralized “bad bank” scheme to sequester problem loans, worth an estimated 200 billion euros (nearly $260 billion), into a number of institutions, freeing commercial banks of billions in toxic assets.
Until now, all the talk about the European recession has focused on the problem in the “emerging market” economies of central Europe — economies that overindulged in a credit bonanza fueled by an orgy of foreign currency-denominated lending. The worst-case scenario thus far has been a financial collapse in central Europe could spread via the Austrian, Italian, Swedish and Greek banks — all culprits in the regional credit binge — into western Europe. The focus, however, is slowly shifting back toward “old Europe,” with particular concerns over the German economy — the largest in Europe and the fourth largest in the world (in 2008) — due to slumping exports and industrial output.
The global economic crisis is cutting demand for goods across the board, from commodities to manufactured products. Exports are key to Germany’s economy, accounting for $1.3 trillion in 2008 — nearly 47 percent of GDP (compared to only 11 percent in the United States, 15 percent in Japan and 32 percent in China). However, German exports saw double-digit drops in both January and February, leading to a 21 percent decline in industrial output in February from the year-ago period.
The Organization for Economic Cooperation and Development has predicted that the German economy might shrink by as much as 5.3 percent in 2009, a much bleaker outlook than the 2.3 percent decline forecast by the European Commission in January. The 5.3 percent contraction would represent the biggest decline for Germany — excluding the immediate post-World War II devastation of 1945 and 1946 — since the depths of the Great Depression in 1932, when the economy shrank by roughly 7.5 percent. Considering that Germany’s GDP equals three times the combined output of its central European neighbors, the slump is certain to have immense effects on the rest of Europe.
Two points immediately become clear when the German slump is considered in the wider European context. First, European capitalism differs from U.S. capitalism in that European companies depend more heavily on banks for lending (American companies usually prefer to raise funds through the stock and bond markets). European businesses and industries rely on interpersonal relationships with their banking counterparts — some going back to the 19th century — for capital and generally eschew the markets and securities. This in turn means that banks’ profits are tied to those of domestic industries, and a rise in bankruptcies due to slumping exports could raise the German (and European in general) non-performing loan ratio to dangerous heights. Therefore, this foreshadows a much more severe recession in the German banking sector, which has been considered solid so far due to its lack of exposure to “emerging Europe” or an overheating housing market.
This brings up the second point: The European recession is not only about emerging markets and their problems with foreign capital, which may or may not be resolved through the recapitalization of the International Monetary Fund and rescue packages to be announced. The recession is also about the European-wide slowdown of industrial activity and trade, which will lead to growing unemployment, particularly in the manufacturing sector. Considering that most of Europe’s industrial sector is still heavily unionized (which also means well-organized for protest), this also points to a rise in social unrest as unions fight to protect jobs. Germany’s unemployment rate hit 8.1 percent in March — an unexpectedly fast rise, considering that the European Commission had expected it to reach 8.4 percent by the end of the year. Unions also will be the first to vociferously demand reversals of a plethora of cost-cutting measures targeting social welfare benefits soon to be implemented by western European governments as they look to curb their 2009 budgets.
Germany is not only a key exporter, but also a main trading partner for all of its neighbors. A prolonged recession in Germany cannot help but keep the rest of Europe stalled. It also will mean that the German government remains mired in domestic affairs while Russia tests European unity on numerous geopolitical issues. A weak and vulnerable Berlin will be far more acquiescent to Russian demands — particularly if it feels that its energy supplies from Moscow could be threatened mid-recession — than a confident and focused one would be.
