Tuesday, June 22, 2010

Does Germany Benefit from Austerity?

Germany's control over the monetary and fiscal policies of nations across Europe may become a growing theme as German incentives are all kinds of twisted... a weak Europe actually benefits Germany (at the possible expense of the broader EU). Any weakness creates a de facto monetary easing policy for the German nation. Not only does it decrease their borrowing costs in a flight to quality, but the benefit of a cheap Euro resulting accrues almost solely to the German economy via exports as other European nations cannot compete with German productivity at a tied exchange rate.

As the WSJ detailed last week:

The benefit is being felt by countries such as Germany, whose economy depends more on trade than others in the region. So while Europe's near-term growth outlook brightens, the growing gap between the haves and have-nots will likely keep Greece, Spain and others under pressure as they face fiscal austerity.

Despite the euro's roughly 15% depreciation against the U.S. dollar over the past six months, it is unlikely that Greece and Spain will be able to export their way to faster growth, given that their economies aren't very tied to global trade. That leaves painful spending cuts and years of stagnation as their only hope of gaining ground against their more productive peers to the north.

Such a solution implies years of subpar growth as those economies revamp their labor markets and budgets, and could fuel tensions in Europe over whether Germany's export-dependent growth model is destructive for the region.

And news coming out of Germany this morning shows the impact this export boom may have on broader German business. The FT (hat tip Dead Cats Bouncing) details:

German businesses have shrugged off Europe’s debt crisis with corporate optimism in the continent’s largest economy rising to its highest level for more than two years.

The Munich-based Ifo institute reported that its business climate index had risen from 101.5 in May to 101.8 this month – the highest level since May 2008.

The unexpected rise – almost certainly boosted by a weaker euro – highlights the robustness of the export-led upswing underway in Germany. It will help calm fears that Europe’s economic recovery will be blown off course by fiscal austerity programmes and weaknesses in the continent’s banking system. “The economic recovery is continuing,” said Hans-Werner Sinn, Ifo’s president.

Germany is under international pressure to support its economic recovery and to take steps that boost domestic demand and thus lift prospects across the 16-country eurozone. The Ifo index’s increase is unlikely to deflect much of the criticism, however, especially as it is not yet clear how long the upswing will last.



So, while many are questioning why Germany is playing the austerity card on their European neighbors (as well as themselves) make no mistake... along with a past that dictates austerity over deficit spending, a weaker Europe resulting from austerity may be immensely beneficial to the German economy.

Source: Ifo