Bad news in the euro zone: Germany’s economy contracts

posted at 12:01 pm on January 15, 2013 by Erika Johnsen

Despite the euro zone’s various bureaucracies wheeling and dealing in bailouts, stimulus efforts, and “austerity” programs for years now, they haven’t really managed to move the collective needle on coming up with long-term substantive initiatives for solving their members’ metastasized debt problems.

Plenty of Europeans seem to hold the blasé, zero-sum notion that Germany should just stop being so darn tight-fisted and simply share the wealth of their relatively sane fiscal management, but even Germany isn’t immune from the effects of the EU’s long-term poor fiscal policies. The WSJ reports that Germany has finally succumbed to the economic weakness pervading the rest of the euro zone, registering a contraction in the fourth quarter that likely means the common currency shared the same fate:

Germany’s federal statistics office Destatis Tuesday said Europe’s largest economy expanded 0.7% in 2012, but its gross domestic product probably fell by 0.5% in the fourth quarter. …

That equates to a contraction of 2.0% in annualized terms, JP Morgan estimates. …

Compounding the problems for Germany, the government is cutting its 2013 economic growth forecast to 0.4% from 1.0% previously, a German economics ministry official told The Wall Street Journal on Tuesday. …

The euro-zone economy contracted in both the second and third quarters as austerity programs and rising unemployment ensured that output fell in large members such as Spain and Italy. …

But those contractions in other parts of the euro zone, and less favorable export markets, finally took their toll in the final three months of the year. And when it came, Germany’s economic downturn was deeper than expected, as the majority of private-sector economists had penciled in a quarterly drop in GDP of 0.2% or 0.3%.

The general wisdom (of which I am wildly skeptical, for the record) seems to be that the German economy could rebound fairly quickly, since the absolute worst of the euro zone’s immediate economic crisis may perhaps be over as uncertainty wanes and investments and exports recover as other areas of the global economy strengthen.

But, the fact remains that the euro zone is still ripe with miserable economic conditions (Spain’s current unemployment rate stands at over 25 percent!), the endemic fiscal problems aren’t fixed, and the reigning sense of entitlement will always take a massive chunk out of would-be robust prosperity. Most unfortunately, as The Economist recently lamented, this type of systematic political can-kicking is already a transatlantic sport:

FOR the past three years America’s leaders have looked on Europe’s management of the euro crisis with barely disguised contempt. In the White House and on Capitol Hill there has been incredulity that Europe’s politicians could be so incompetent at handling an economic problem; so addicted to last-minute, short-term fixes; and so incapable of agreeing on a long-term strategy for the single currency.

Those criticisms were all valid, but now those who made them should take the planks from their own eyes. America’s economy may not be in as bad a state as Europe’s, but the failures of its politicians—epitomised by this week’s 11th-hour deal to avoid the calamity of the “fiscal cliff”—suggest that Washington’s pattern of dysfunction is disturbingly similar to the euro zone’s in three depressing ways.

… The euro crisis deepened because Europe’s politicians serially failed to solve the single currency’s structural weaknesses, resorting instead to a succession of temporary fixes, usually negotiated well after midnight. America’s problems are different. Rather than facing an imminent debt crisis, as many European countries do, it needs to deal with the huge long-term gap between tax revenue and spending promises, particularly on health care, while not squeezing the economy too much in the short term.


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