It’s not summer holidays what lead to the bad August of the German economy

Discussion between Angela Merkel, on the right, and José Manuel Barroso during the Western Balkans Summit (EC Audiovisual Services, 28/08/2014)

The second quarter was very disappointing in terms of GDP figures for Germany. The biggest European economy is facing tough times at the moment Russia imposes economic sanctions against the EU. It is now more than necessary for Germany to find a way to climb up to growth but its fiscal policy comes as an obstacle to this.

Germany shows signs of economic turmoil

Germany’s GDP growth rate for the second quarter showed a surprising decline of 0.2 per cent.  This was not due to consumer consumption but because export sales and investments failed to boost the economy. More specifically, exports increased by 0.9 per cent compared to the 1.6 per cent rise of imports. Thus, the negative effect of trade balance realized by the difference between exports and imports was a major contributor to the economy’s GDP decline.

What is more, the manufacturing output was modest not only in the Eurozone but in Germany as well. Germany’s manufacturing sector contributed to the slowdown of the economy by showing poor expansion. In particular, the manufacturing Purchasing Manager’s Index (PMI) for Germany, an index which is measuring the sector’s expansion or contraction, if it is above or below 50 accordingly, dropped to 51.4 in August from 52.4 in July. This shows the slowest expansion that the country has realized in the past 11 months in this sector.  It is also worth mentioning that France and Italy, the second and third largest manufacturing economies in the Eurozone, showed contraction with PMI readings below 50. Therefore, it is crucial for Europe and especially for Germany to consider these problems seriously by investigating the causes more in depth and provide permanent solutions.

Russian sanctions & the German economy

The third round of economic sanctions that Europe imposed to Russia was not left unreturned. Russia responded by imposing an embargo for one-year period (starting from the 7th of August) on imports of most of the agricultural products whose country of origin had adopted the aforementioned sanctions. And this had and keeps on having a huge impact on the EU and Germany in particular since it is a heavily export-oriented economy. This effect is fully understood if we consider that Germany is the largest exporter to Russia compared to any other European country reaching 1.6 billion euros in 2013. This and the fact that the Russian sanctions began about a month ago implies that Germany will be heavily affected regarding its exports in the coming third quarter when the consequences of this ban will be more intense. Something that the German government has to take into consideration since a new round of economic sanctions is about to start today from the EU against Russia if the latter is not going to support a peaceful procedure in Eastern Ukraine.

German austerity Vs. Russian sanctions

Further, he German fiscal policy is not working well and may keep on this way if Germany is not going to do something to change the setting. A policy that lies on the grounds of austerity is not going to produce growth neither to the country and nor to the rest of Europe. Of course the issue of the Russian sanctions is of severe importance but on its own is not enough, at least with what we have seen so far, that is diving into deep recession economies of the scale of Germany. Therefore, the sooner Germany realizes that, the better for the Old Continent. It is time for Europe and its biggest economy to admit the fact that this path is leading to greater depression.

Let’s face it and act now!