Europe?s largest exporter, after running up high levels of debt and losing its position as the world?s largest exporter to China during the global downturn, has reported a sign of recovery?a 2.2% growth in GDP in the second quarter. For a country that, last year, was in its deepest recession since the 1950s, Germany is now experiencing an export-led boom, with unemployment climbing down to 7.6%, down almost to pre-crisis levels. The statistics released by the Federal Statistical Office (Destatis) spurred economists to predict that the German economy will grow by 3% in 2010-11, making it the frontrunner of the Eurozone. To the chagrin of the Keynesians, the proponents of fiscal conservatism are attributing this performance (at least in part) to the budget balancing measures put forth by Chancellor Merkel. The strong growth figures will bolster the conviction that their short-term sacrifices, not made by their European partners, have paid off in the long term. By resisting debt-fuelled consumption, Germany avoided creating a housing bubble and economic overheating.
Data on Europe shows that Germany?s export-led growth with booming sales to the emerging economies has led to the euro area?s economy growing faster than America?s. This path to recovery, however, is strewn with challenges. German companies have benefited from concerns about debt problems in PIGS, which pushed down the value of the euro against the dollar, making German products more competitive. How long the euro will remain subdued, giving exports a competitive edge, is difficult to say.
Another important consideration is the markets on which Germany is dependent for generating demand for its industry (that accounts for 25% of GDP). China is slowing in part to avoid over-heating and the US is experiencing a slowdown in response to doubts about deflation and a ?double-dip? recession. Given these hurdles, it may be too early to celebrate the recovery in Europe. The ECB has predicted that growth during the rest of the year will be ?significantly less dynamic?, while S&P predicts that growth in Europe is likely to be past its peak. The Eurozone countries, barring Germany, continue to suffer debt woes (with Greece, Spain, Ireland and Portugal leading the club) while Germany forges ahead, leaving the ECB with the predicament of dealing with a two-speed Europe.
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