How Strong Is The German Economy?
July 17, 2012 | 2 comments | includes: EWG
Although it is often depicted as the singular bulwark of economic strength and sensibility in Europe, in reality there are quite a few reasons to get worried about Germany’s economic future.
While Germany pursued sensible economic policies under the previous (socialist!) government of Gerhard Schröder, most notably some labor market reforms, one should not forget that Germany’s economic renaissance is to some degree the result of the euro itself. The creation of the euro removed the exchange rate risk in the periphery (Greece, Portugal, Spain, Italy, Ireland) and as a result, it propelled a huge amount of capital flows from the center to the periphery.
The mirror image of these were current account deficits, basically the periphery accumulated positive inflation differentials with the core countries and became uncompetitive. The result of this was a German export boom to the periphery. You can see the development of the respective trade balances in the figure below: [Read on here]