Friday, January 20, 2012

Germany at its best hour: Leadership for european economic recovery

Some economic agents might be surprised about the recent downgraded by ratings agencies, of European countries, Banks and even stability funds, but perhaps much more from it, because it did not hurt (at least in the short term) too much the market expectations about European economy prospect , to cope with its debt constraint . .-
Well , maybe an analogy might help.It is like you drive in a Dakar-America rally, or for this matter any rally . It is not just about the driver , but also about the engine. There has been criticism about the driver in the Euro zone economy , whether it is the European Central Bank, or Politicians, but the engine (German economy) has been strong enough to keep going. The markets expectation concerning Europe, might well be also shaped around the German economy prospect to keep the pace on growth .-
Thus, no matter what the ratings agencies said, markets look at the performance of the main engine of Europe economy ,as the key force capable of getting things back to normal , including the credit worthiness. However, it is not only about the German economy(the engine), but also about the required reforms to keep the pace. Let go first to the engine , then to the reforms.
As a consequence of the financial crisis , Germany economy (GDP) shrunk by -5.1 % (2009).It was the deepest fall in more than sixty years. but the two following years (2010, and 2011), the German economy made strong gains in economic growth (3%), which allow it to have an healthy fiscal position due to tax increase by 6% because of growth (meaning 1% deficit, well below Euro zone average), and public debt under control.
Although German economy is considered to be an export driven economy, (40% of its GDP comes from exports),consumption and investment ,made its way through in 2011 to increase up to 1,5% , the highest in five years (, 1/12/2012).
Besides, German economy was leading contributor (2010) for intra EU share of trade in goods, services and foreign investment which is more than 50% of total .Moreover ,Germany rates of Exports growth kept a steady pace (16% in 2010).Thus ,Europe expectation to deal successfully with the debt crisis implications are linked (at least 50%)to Germany economy performance. Will it be enough to avoid the risk of recession in the euro zone?.It will depend upon the complementary strategy, Germany and its allies apply to support neighbors´ economic growth.-
Although the consensus forecast 2012 for Europe, goes into the direction of slower economic growth with 50% probability of a recession, the strength of the German economy engine, might play a key role to get a better performance for the euro zone economy, such that the recovery comes along sooner . However, it all comes down to the implementation of proper reforms and policies specially those aimed at supporting growth (medium size enterprises) and competitiveness( higher efficiency on States programs). Therefore ,It is not just a matter of austerity ,but also of economic growth. The German made engine,is still running.-