ZEW: Outlook For Germany Drops At Fastest Pace In 14 Years

It is very difficult to have a dry island in a severely over-flooded region. Germany’s economy is strongly dependent upon exports and nearly 44% of her export are to other EU countries. If the economies of EU countries like Greece, Spain, Portugal, Italy etc. get in trouble then to expect that Germany will remain unaffected is not rational. Still, Germans led by Merkel are sticking by the argument that Southern Europe is responsible for the its problems and the solution should be policy and structural changes within that region without any accompanying policy changes in Germany and Northern Europe. The latest ZEW economic sentiment survey exposes the fallacy of that argument.

“The financial market experts’ expectations are a strong warning against a too optimistic assessment of Germany’s economic perspectives in the remainder of this year,” said ZEW President Wolfgang Franz. “The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear.”

The index fell most in 14 years.

After a 12.6-point downturn in May, the ZEW’s economic sentiment indicator lost an additional 27.7 points in June to -16.9, its sharpest monthly decline since October 1998 and its lowest level since January.

The situation is not going to improve soon.

Recent hard and soft data suggest that 2Q is unlikely to see anything similar to 1Q’s 0.5% jump in economic activity, as a slowing global economy and a debt crisis continue to weigh on demand and morale.

“The recession in Euroland is deepening,” Sentix said. “We are no longer just looking at a downturn.”

Bundesbank seems to be concerned too,

The Bundesbank warned this week that uncertainty surrounding economic prospects had increased “notably” in recent weeks. “It still has to be seen to what extent the latest exacerbation of the debt crisis and signs of a slowing global economy will weigh on Germany’s economic outlook,” the central bank said.

Perhaps, it is time to heed to the advice of Paul Krugman and ease-off on the austerity and even do some thing to stimulate the economy. Any resultant, inflation will reduce the pressure on Southern Europe, which would be good for Germany too as a majority of her exports go there.

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