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Germany: From über to unter

Did anyone on the continent know, back when the EU was formed, that with the exceptions of England and (to a lesser degree) France, the other countries of Europe were, in effect, becoming economic client states of Germany? And would they have cared if they had? Did Germany know its relationship with these countries would gradually shift from that of big brother / little brother to that of stepfather/stepchild? Did Germany know it would be the one to get the call every time one of its adopted children ran out of money? And could anyone have predicted how often the phone would ring?

If Germany never foresaw its new role, or the challenges that role would create, that only makes its benevolence more commendable. That Germany wouldn't or couldn't do everything that was asked of it is certain, but just as certainly, it did what it could, and more importantly, it did what it had to do. Germany held the Eurozone together, and it did so while remaining a – no, let's be honest – the pillar of world financial solvency. Some Germans voiced resentment at always having to help other countries, but I suspect resentment was greater, if generally silent, among those countries that had to do the asking. Mostly, these countries were guilty of nothing more than continuing to govern themselves as they always had (though that was quite badly, in some cases) then suddenly finding themselves pinned down by a currency over which they had little control.

In any case, all has changed now – father took a bad fall. The blame falls partly on the inevitable complacency of prosperity, but to a greater degree on the conflict in Ukraine and the accompanying breaking of economic ties with Russia.

For those keeping score, we have three bad economic reports – and this is the eye-twitch, hand-tremble, stomach-twist sort of bad – out of Germany just this week. On Monday came the news that factory orders had fallen by 5.7% in August. Many economists had predicted a downturn, but the consensus was a decline of just 2.5%. On Wednesday came the manufacturing PMI, which was 49.9, (where below 50 means a decline). On Thursday came the worst news yet: a decline of 5.8% in exports in August. The iShares MSCI Germany ETF (EWG) is down 2.6% this week, and worse is likely on the way.

Germany's stumble calls a great many assumptions into question and threatens Germany's plan to have a fully balanced budget in 2015. Until this week, European leaders had been responding to the latest economic downturn in the EU the same way they always had, by calling for Germany to spend more, to loosen more, to support more… That isn’t going to happen this time, as Germany will be focused on responding to its own internal crisis. Those who have come to rely on German benevolence are about to get a lesson in German pragmatism. Plan A is off the table, and there is no plan B.

Had Germany's economy sputtered out three years ago, while the sovereign debt crisis was acute, the Eurozone would no longer exist, and it is worth pointing out that its breakup would certainly cause great pain, even if its creation was a bad idea to begin with. As to that, the European Union experiment has been called many things, but rarely a smashing success. To say that its future is uncertain is about all one can say today with any degree of certainty.

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.