Euro Watch: German Economy Shrank in Fourth Quarter

The Federal Statistical Office in Wiesbaden estimated that the German economy shrank about 0.5 percent in the final three months of 2012, compared with the previous three months. The decline was largely the result of sagging investment by German managers worried about the future of the euro zone.

And despite reassurances from economists that growth would bounce back quickly in Germany, the data underlined how closely the country’s fate remained tied to its ailing euro zone allies.

“This idea that Germany is a powerhouse dragging the rest of Europe along with it is a bit of a myth, to be honest,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “You have a very weak periphery, and a core which is not as strong as everyone seems to believe.”

Throughout the European debt crisis Germany has managed to float above the bad news, enjoying record employment, rock-bottom borrowing costs and export-led growth that kept chugging in spite of the cloud hanging over the euro zone. But Germany’s European partners are also among its biggest customers, leaving it vulnerable to the Continent-wide slowdown made worse by the very austerity policies championed by Chancellor Angela Merkel.

Portugal’s central bank on Tuesday cut its economic forecast for this year, saying the economy would contract more steeply than expected. France has probably missed its target for reducing the budget deficit, according to data published Tuesday, raising the prospects of deeper spending cuts and additional taxes. Meanwhile, elections pending in Italy next month have ground that country’s drive toward economic overhauls to a halt.

“The longer the euro crisis lasts, the more difficult the situation becomes for Germany,” said Stefan Kooths, an economist at the Kiel Institute for the World Economy. “We have always said Germany is not a Teflon economy.”

The German government is scheduled to release its report on the economy Wednesday and will forecast growth of 0.5 percent this year, the Handelsblatt newspaper reported, saying it had obtained a copy of the document. In the context of the euro zone as a whole, which is in recession with record unemployment, any growth is considered positive.

But most forecasts are based on the assumption that financial markets will remain calm. If anything were to shake investor confidence in the euro zone, like political turmoil in Italy or Greece, the weak growth rate would mean that Germany would not have much of a cushion against recession.

France is en route to missing its deficit reduction target this year, according to preliminary data released Tuesday by the French government. Although the government aimed for a deficit of 4.5 percent of gross domestic product, data for November suggest the shortfall will be 4.8 percent, ING Bank estimated.

That means the French president, François Hollande, would have to find an additional €5 billion, or $6.7 billion, in revenue to meet the 2013 budget target, and could risk another downgrade of the country’s credit rating.

The data also indicate the challenge of keeping France’s overall level of debt from rising beyond its current level, which is already above 90 percent of G.D.P.

“Today’s figures underline how difficult the task will remain for François Hollande to keep the debt below 100 percent of G.D.P. during his mandate, and France’s rank in the core of the euro zone,” Julien Manceaux, an economist at ING, wrote in a note.

German public finances contrast with those of France. Together, German federal, state and local governments recorded a budget surplus for the year equal to 0.1 percent of G.D.P, the statistical agency in Wiesbaden said. That is the first government surplus since 2007, and it creates leeway for Ms. Merkel to stimulate the economy with public spending if the downturn is worse than expected.

The fiscal strength in Germany underscores the inequities within the euro currency union. Already, the government has been expanding a program that encourages companies to cut worker hours rather than eliminate jobs. The so-called short work program uses government money to compensate employees for some of the wages they lose by putting in fewer hours.

Within the region, Germany has served as a crucial counterweight to the struggling economies of Southern Europe, and helped to stabilize the euro zone as a whole.

Article source: http://www.nytimes.com/2013/01/16/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss