An unexpectedly robust German economic rebound has allowed the eurozone to escape recession, highlighting diverging fortunes across the region but also the country’s scope for lifting the prospects of weaker rivals.
German gross domestic product expanded 0.5 percent in the first quarter of the year compared with the previous three months, a much stronger pace of growth than economists had forecast. As a result, eurozone GDP remained flat—rather than contracting as had been widely expected—despite further falls across much of southern Europe and stagnation in France, the eurozone’s second-largest economy.
Although the eurozone debt crisis could yet deliver an economic "shock", Germany has emerged from the crises of the past few years as one of the world’s best-performing advanced industrial economies. Unemployment is near record lows since reunification in 1990, while business confidence remains high.
GDP in Europe’s largest economy had contracted 0.2 percent in the final three months of last year, which largely explained a 0.3 percent fall in eurozone GDP, and raised fears of a technical recession, defined as two quarters of negative growth. But German weakness was only temporary.
Eurozone divergences have complicated the task of the European Central Bank. Although interest rates are widely seen as too low for Germany, the rest of the bloc is not yet ready for any policy tightening. Jens Weidmann, Bundesbank president, is prepared to tolerate a German inflation rate above the eurozone average—but Germans’ deep-seated worries about inflation trends limit the ECB’s room for maneuver.
German politicians, meanwhile, have come under international pressure to use fiscal policy to boost domestic consumer spending as way of further stimulating demand for imports.
Some signs of a eurozone "rebalancing" have already emerged, however. The main driver of German growth in the first quarter was exports, according to the country’s statistical office. That reflected German success in selling top of the range manufactured goods and services outside the eurozone—especially to China and Russia.
But German domestic demand also picked up in the first quarter, which would have sucked in exports from other parts of eurozone and beyond. Germany is the most important export market for most European economies. Italy’s exports to Germany in the first quarter were almost 11 percent higher than a year before, while Spanish exports were up more than 4 percent.
"People think that German private consumption has to increase very strongly for Germany to act as a growth motor for the eurozone," said Andreas Rees, European economist at UniCredit in Munich. "But if you look at trade in the eurozone, consumer goods do not play a decisive role. It is capital and intermediate goods—parts of the manufacturing process—that matter."
Still, with fiscal austerity programs starting to bite, the eurozone’s economic outlook remains bleak. The latest data are unlikely to dispel worries about the effect of the region’s re-escalating debt crisis or the ramifications of a possible Greek exit. "We haven’t got through the crisis yet—there is a long road ahead of us," warned Markus Kerber, director of Germany’s BDI industrial association. What is the main idea of this article