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Reasons why Germany stagnates and why it's about Europe's economy

April 17, 2019 08:02 AM
Updated on April 17, 2019 at 08:33

European economic locomotives emit anxious signals.

Bundesbank, the German central bank, expected a 1.6% growth in December on Friday, but Jens Weidmann lowered his expectation to less than 1%.

And this negative figure is not isolated, but adds to the trend that began in the previous year, which threatens the global economy.

Germany's gross domestic product (GDP) fell 0.2 percent in the fourth quarter of 2018 and did not recover in the first three months of 2019.

It is not serious data, but in Germany it is a surprise and anxiety.

In general, the economy contracted for a second consecutive quarters. This means that the largest European economy has avoided the smallest fall in that country.

Fall of industrial production

One reason for this cooling is to look at the decline in German industrial production in recent months and the collapse of industrial orders as seen in this graph.

In February, the Federal Statistics Office data showed that exports fell by a mere 1.3 percent from a month earlier.

Exports have risen 3.9% in the past 12 months, but the short term outlook is not positive.

Problems coming from China

According to a study released in early April, orders and exports are falling at a pace that has not slowed since the last global financial crisis.

One of the major drivers of this trend is the decline in China demand, one of Germany's main customers.

Why is the German economy important?

What happens to the economy in Germany, which accounts for 29% of the eurozone, depends heavily on the rest of Europe.

It also has a direct impact on other parts of the world. Germany is the 4th largest economy in the world after the US, China and Japan and is the world's third largest exporter after China and the United States.

It has strong economic ties with Latin America.

Berlin is the fourth largest Latin American country, such as Argentina, Mexico, Colombia and Chile. According to the International Monetary Fund (IMF), one-third of the region has been taken as a whole.

Positive data

However, not all German economic indicators are negative. The unemployment rate in the country is the lowest in the world at 3.1%, and it has continued to decline in times of weak GDP.

The construction sector is one of the sectors that continue to provide positive data for the German economy. AFP

Only the Czech Republic, Iceland and Japan have low unemployment rates within the advanced economic group.

The percentage of working-age population has grown by 0.2% in the last two quarters of 2018.

Despite the delicate moments of industrial production, service and construction are experiencing a moment of expansion and a strong internal market is maintained, so the explanation for the apparent contradiction between the various economic indicators can be found in spite of the ongoing industrial production There is.

Situation of Eurozone

On the other hand, the brakes on German growth have not occurred apart from the rest of the eurozone in recent months.

Some countries, such as Spain, the eurozone economy, have continued to grow at a good pace, but other countries like Italy are in recession.

In fact, the Italian economy has not regained its reach before the financial crisis 10 years ago.

And unlike Germany, unemployment in the rest of Europe is very different from country to country. Overall, the euro area average is relatively high at 7.8%.

In countries like Italy, Spain, and Greece, double-digit rates are maintained and up to 18% in Greece.

US and Brexit tariffs

There are many reasons for economic problems throughout Germany and the eurozone.

On the other hand, recovery after the financial crisis never ended.

On April 10, the EU and the UK agreed to extend the Brexit deadline by October 31, 2019. Good image

Last year, the region suffered from a poor situation in world trade. In addition to the above-mentioned cooling of the Chinese economy, US President Donald Trump's tariffs on steel and aluminum imports also affected.

The possibility of these tariffs being applied to automobile imports will have a greater impact on the German economy in particular.

On the other hand, uncertainty about the lack of consensus on Brexit was another factor mentioned in the survey when German companies were asked about the reasons for bad economic growth.

Internal factor

The recent extension of the negotiations between the UK and the European Union has had a positive impact on the morale of German investors.

The drought limited the circulation of the Rhine, which is one of the major arteries of industrial traffic in Germany. Good image

The ZEW index, which was developed by Mannheim's European Economic Institute Leibniz Center and measured the economic climate, rose to 3.1% in April and pumped for the first time since March 2018.

However, with the changes in the international context, the German economy was exposed to internal factors such as the introduction of new ones. Inspections This affected car production last year.

It also affected the drought, and the Rhine, an important commercial artery for the German industry, limited the shipment of goods for a short time.

Options of the ECB (several)

One of the key questions in this situation is what the European Central Bank can do to encourage growth in Germany and Europe.

The available options are limited, and using economic policies as a tool to prevent economic cooling can be complicated.

The interest rates of the European Central Bank are already at the lowest level. The main rate is 0, the amount applied to the loan facility is 0.25%, and the deposit rate is -0.40%.

The European Central Bank stopped the "quantitative expansion" policy of purchasing financial assets with newly established funds at the end of last year.

It is possible, but complex, to go back to this type of action. For certain asset types, the ECB is approaching the maximum amount without market distortions.

From a political point of view, this measure will always have difficulties, especially in Germany.

The "making money," sometimes called this program, can cause inflation and fright in Germany for this phenomenon that hit Germany in the early 20th century.

What can the German government do?

Other tools to revitalize the economy, such as lowering taxes or increasing public investment, are in the hands of the German government.

Many economists argue that Germany has room to choose this route. The German government spends less than taxes but is reluctant to use the finances to stimulate the economy.

Recent European Commission recommendations have indicated that it is still necessary to apply "prudent" policies to ensure the sustainability of member countries' accounts.

On the other hand, some critics think that the rules of the European Union regarding the eurozone government's accounting are too restrictive.

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