Accidental Stimulus The Unexpected Bonus

A free falling euro and oil price is giving Germany a stimulus it doesn’t need. Europe’s largest economy can expect another year of decent growth, despite all the problems facing its European neighbors.
German industry continues to assert itself on the international stage.

Germany doesn’t really need any help.

No other industrialized nation recovered more quickly from the 2008-2009 global recession. Europe’s largest economy is likely to continue growing at a stronger pace in 2015 and 2016 than the rest of the 19-nation euro currency zone, much of which remains mired in a trap of high public debt, high unemployment, low growth, and now possibly deflation.

And yet, help it will receive: Germany is now getting something akin to its very own stimulus program.

The plunging value of the euro, which hit an almost nine-year low on Monday, and an even stronger drop in global oil prices over the past few months, are likely to benefit Germany’s export-heavy economy more than most of its neighbors – those countries that really do need the help.

“Within Europe, Germany’s economy will benefit above all, as it exports an especially large portion of its goods to countries outside the euro area,” said Marcel Fratzscher, president of the Berlin-based economics institute DIW.

Add to that the European Central Bank, which is readying plans for a major government bond-buying program known as quantitative easing. It is a program intended to mainly aid southern Europe, but the plan will serve as yet another stimulus for Germany’s economy, too.

This is the effect of the euro zone’s ongoing economic crisis: Germany continues to be the big winner from efforts to save the currency bloc from collapse. Five years after the crisis began, the economic gap within the currency bloc remains as large as ever. Germany's economy remains well ahead of its peers.

Within Europe, Germany’s economy will benefit above all, as it exports an especially large portion of its goods to countries outside the euro area. Marcel Fratzscher, President, DIW economics institute

Germany has succeeded here against the odds. While its neighbors – particularly in southern Europe – saw their manufacturing bases crumble in the past few decades against cheaper competition from emerging markets, Germany’s industry has remained competitive on the global stage.

Its powerful manufacturing base has succeeded here where most other industrialized countries haven’t: It has emerged a “globalization winner,” according to Ulrich Grillo, head of the German industrial association BDI.

A study commissioned by BDI and obtained by Handelsblatt found that Germany has managed to grow as an industrial power base over the past 20 years, even as major emerging market players like China surged onto the scene as a maker of cheap goods.

Industrial production in Germany grew 45 percent between 1995 and 2012 while major European rivals including France and Britain saw their manufacturing bases stagnate, growing just 3 percent and 9 percent respectively over the same period, according to the study. Machine tool production reached a record €212 billion ($252 billion) last year in Germany, despite many global flashpoints including between Russia and Ukraine.

Exporters in Germany have held on to their market share better than most of their peers, the result of keeping workers’ wages comparatively low and moving some production to other countries.

The country’s share of global exports has held steady at around 10 percent over the past two decades, while that of France and Britain has been nearly halved to less than 4 percent each, the BDI study found.

Changing Exports Powers-01


All of this means Germany’s economy looks relatively solid heading into 2015, even as its neighbors continue to grapple with high jobless rates and low growth.

Germany is expected to grow 1.5 percent this year, according to the latest forecasts from the country’s economic institutes. Only small, dynamic European economies like Estonia, Latvia and Ireland are experiencing stronger growth rates.

Employment reached a record high last year – 42.6 million men and women held jobs – helped by record immigration into the country, both from eastern Europe and from the beleaguered south.

Moreover, Germany’s finance minister, Wolfgang Schäuble, has managed to draw up a budget for 2015 that makes do without new borrowing for the first time since 1969. Because of high surpluses in its social welfare budgets, the entire country has been in the black since 2012. The ECB’s record low interest rates have helped push down refinancing costs.

These positive numbers don’t even take into account the recent fall in oil and the euro currency, which can only boost growth in Europe’s largest economy.

The euro has taken a heavy beating in recent days, falling to an almost nine-year low of $1.186 on Monday following speculation about a possible Greek exit from the currency zone and ECB President Mario Draghi’s comments to Handelsblatt that quantitative easing – a broad program to purchase hundreds of billions of euros worth of government bonds - could be on the way.

Add to this the plunging oil price, which in the second half of 2014 fell by the third largest amount in the last 25 years, according to Jim McCormick of the British bank Barclays.

The falling oil price pushed annual inflation in Germany down to just 0.2 percent in December, Germany’s statistical agency said Monday. It could push inflation in the euro zone even lower: analysts expect data on Wednesday to show that annual inflation in the 19-nation currency bloc fell into negative territory in December.

This is a massive concern for the ECB, whose job it is to keep inflation closer to 2 percent. The biggest worry is that negative inflation – even that caused by a temporary drop in oil prices - could prompt consumers and businesses in southern Europe to hold off purchasing goods.

This danger is likely to force the ECB’s hand into spending hundreds of billions of euros on government bonds, essentially flooding the market with free money in a bid to raise prices and avoid full-blown deflation from taking hold in the euro zone.

Whatever the ECB might decide, Germany’s economy will continue chugging along in the meantime.

For Germany’s economy, it presents yet another opportunity.

The country isn’t really threatened by broad deflation. Cheaper oil is good for companies, which have lower energy costs, and consumers who have more spending power.

An inflation rate near zero also means that a salary hike for workers isn’t necessarily lost on higher prices. Economists at German insurer Allianz expect that German workers will see real wage gains of as much as 4 percent in 2015 as a result.

The falling euro and oil price will help Europe’s economy, too. French bank Nataxis has raised its forecast for growth in the 19-country euro zone to 1.2 percent this year, up about half a percentage point from its prediction just two months ago.

Yet some economists argue the ECB should be doing more to tailor its programs to where the help is needed most, rather than making broad gestures that simply push down the value of the euro. Harald Benink, a Dutch finance professor, and Wim Boostra, chief economist of Rabobank, have proposed the ECB buy securities from the European Investment Bank, the EIB. That would allow more money to reach the real economy, they argue.

Whatever the ECB might decide, Germany’s economy will continue chugging along in the meantime.


Norbert Häring, Axel Schrinner, Thomas Sigmund, Frank Specht and Christopher Cermak contributed to this story. To contact the authors:

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