An ailing Germany should worry all

Another weak quarter for the European powerhouse could end up derailing the bloc’s prospects as a whole and in turn further affect the US already wobbling due to a trade war

When a debt crisis slammed the Eurozone nearly a decade ago, Germany’s powerhouse economy helped lift troubled neighbours like Greece, Portugal and Spain above the turmoil. The question that Europe faces now is whether those countries are strong enough to return the favour.

Germany is on the brink of recession after its economy declined in the year’s second quarter. Spain, by comparison, is experiencing brisk growth, and even the Portuguese and Greek economies are expanding. Buoyed by tourism, booming construction and steady job growth, the southern European countries are helping to offset Germany’s weak performance.

But will it be enough? As the US economy appears to slow, China loses momentum and Brexit looms, can Europe dodge a downturn?

The question may be decisive for Europe and crucial for the United States. Most economists are not yet predicting a Europewide recession, but they are worried about the prospect. There is little chance that the European Union can thrive when Germany is sickly.

“If the largest member state is affected,” said Katharina Utermohl, senior economist at German insurer Allianz, “this will also start to weigh on the euro area as a whole because of the close economic relations.”

Should Europe sustain more economic body blows, like a no-deal Brexit, a debt meltdown in Italy or an escalation of the trade war, Utermohl said, “The risk of a recession is rather high.”

Some economists are more pessimistic. “Euroland is headed for a recession,” Carl Weinberg, chief international economist at High Frequency Economics, a research consulting firm in White Plains, New York, said in an email Friday. “All the writing is on the wall.” Weinberg cited numerous indicators of trouble: less production at Eurozone factories, surveys showing increasing gloominess among business managers and a contraction in global trade.

When Germany’s official statistics office reported on Wednesday that the economy shrank 0.1 per cent in the second quarter, shock waves rippled through stock markets around the world. The reaction reflected the degree to which Germany sets the tone for the Continent.

Several risk factors

Germany has the Eurozone’s biggest economy, accounting for more than a quarter of the bloc’s output. It has the most people, 83 million, and the most workers, who help stoke nearly every other country’s economy. The number of European Union countries that count Germany as their No. 1 trading partner is long. It includes France, Italy, the Netherlands, Belgium, Slovakia and Sweden.

The relationships sometimes border on dependency. Germany accounts for 27 per cent of Poland’s foreign trade.

Suppliers throughout Europe earn much of their revenue by selling to big German manufacturers like Daimler, Siemens and ThyssenKrupp. But those companies are struggling.

As it strains against the German downdraft, Europe is battling a host of other woes. High on the list is Italy, which has a stagnant economy, an unstable government and one of the highest debt burdens in the world, giving it the potential to touch off another financial crisis.

Another risk is that Britain will leave the European Union without a deal with Brussels, creating chaos in the flow of goods across the English Channel. And car sales are plunging around the world, threatening an important source of jobs in countries like Italy, France and Slovakia. The biggest squeeze comes from the US-China trade war.

Germany is especially vulnerable to trade tensions because exports account for almost half of the country’s gross domestic product. And it is most sensitive to the downturn in the auto industry because vehicles are the country’s biggest export. Sales of German cars have slumped as Chinese buyers pull back.

It can be difficult to gauge how deeply other individual economies are rattled by the trade war, but the latest numbers across Europe, released Friday, contained troubling signs. Eurozone exports fell 5 per cent in June, the European Union’s official statistics agency reported. Trade accounts for about one-third of the bloc’s gross domestic product.

Even if Europe manages to avoid two consecutive quarters of declining output, the technical definition of a recession, no one expects growth to be particularly impressive.

“The slowdown in growth is everywhere in the Eurozone, more or less,” said Jorg Kramer, chief economist at Commerzbank. “There is no decoupling.”