Weaker Growth Helps Shift Germany’s Approach to Sovereign-Debt Crisis
Recent German data show clearly that the sovereign-debt crisis is starting to bite. This might help explain why the government has given a green light to the European Central Bank’s (ECB’s) new sovereign-bond purchase program. It may also indicate a more lenient approach to Greece—at least for the time being.
Although Germany has avoided the post-bubble hangovers afflicting many other developed nations, business conditions have deteriorated markedly this year. Uncertainty resulting from the sovereign-debt crisis has depressed investment spending, while weak demand growth in the periphery has weighed on German exports.
Perhaps surprisingly, the first has been more important: year-over-year growth in German capital spending has slumped from an average 7.2% in 2011 to –1.8% in the second quarter of this year.
By contrast, the slowdown in export growth, from 7.9% to 5.5%, has been muted, with the negative impact of the sovereign crisis on German exports cushioned by resilient trade with non–euro-area countries. In the three months to June, German exports to euro-area countries declined 2.4% year-over-year, but exports to non–euro-area countries (60% of the total) rose 9.8%.
However, signs of weakness in the global economy mean that Germany may no longer be able to rely on exports to countries outside the euro area to offset collapsing demand in the periphery.
All of this provides an interesting backdrop for recent developments in the sovereign-debt crisis. Last week, the ECB announced a new, more aggressive approach to sovereign-bond purchases. Officials hope that the new Outright Monetary Transactions (OMT) program will reduce euro-area breakup fears and lead to a durable improvement in financial conditions in the periphery. If so, this should also help stabilize business sentiment in Germany, allowing positive fundamentals to reassert themselves.
But one of the more striking aspects of the new bond-purchase program is that German Chancellor Angela Merkel moved so quickly to endorse it. In part, this may be because she realizes that the existing bailout funds are inadequate. But it is also possible that slower growth has sharpened made the government willing to consider a more flexible approach to the sovereign-debt crisis—especially with the federal election moving onto the horizon.
If so, the government may also be aware that business conditions in Germany are currently similar to those in Germany just before the collapse of Lehman Brothers. There may be an important warning here. While ECB bond purchases could help stabilize German business conditions and pave the way for a gradual recovery in 2013, a big policy error could plunge both Germany and the rest of the euro area into a very deep recession. This is perhaps the most salient reason why we continue to think a Greek exit from the euro should be avoided.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.