Eurozone medium term view

Discussion and Analysis by Charles Porter: 

Once perceived as the Sick Man of Europe and now as the figurehead of macroprudential policy, today, Germany painted a pessimistic picture of the short-to-medium term German and European economy.

 

The ZEW Centre for European Economic Research curates a monthly survey of financial experts and investors throughout Europe to produce a points-based index of future economic performance. Their publication earlier today, condemning the future of the Germany economy, presented a substantial fall of 7.5 index points, 43%, which surpassed the anticipated fall of 2.5 index points.

 

Germany, an export-led economy, fears a compounded loss of competitiveness. The fall in sentiment was driven by adverse currency concerns and spill-overs from the Volkswagen emissions scandal. These two concerns were mutually reinforcing, culminating in the unanticipated index-fall. Specifically, a gradual, 12.5%, increase in the value of the Euro vis-à-vis the dollar since January has exaggerated experts’ concerns of a weak international perception of German manufacturing products and regulatory reform, both derived from the emissions scandal.

 

Despite ZEW’s findings, the Bundesbank is quoted as optimistic about the future of the German and European economies. The vocal complaint that the ZEW survey represents will exacerbate extant pressures upon the European Central Bank, which already faces the impending 2% inflation target and disparate economic performance across the Eurozone. Stimulus may not be required for the pessimistic Germany economy, but taming the treaty-enshrined inflation rate, and raising the interest rate, may result in an appreciation of the Euro which German exporters are unlikely to welcome.