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Will Germany Be Forced To Help Out Its Trade Partners As Crisis Deepens?

The export slump is the worst Germany has seen for 40 years
The export slump is the worst Germany has seen for 40 years
Germany has Europe's biggest economy, so many Europeans regard it as the natural leader for forging any united response to the financial crisis. But so far, Berlin has avoided that role, partly because Germany has been less hard-hit than its neighbors.

Still, nothing stays the same forever. Now Germany's exports are dropping as its trade partners stop buying. And that raises a question: will Germany have to help its partners out of its own self interest?

Recent statistics show that Germany's Gross Domestic Product (GDP) has contracted over the last three successive quarters, most recently by 2.1 percent in late 2008.

And much of the shrinkage is taking place in Germany's export sector -- the biggest in the world -- and normally the source of 30 percent of the country's income.

The government-affiliated Destatis statistics service, which measures the economy, said exports during the last three months of 2008 fell by 7.3 percent. It is the worst slump in German exports in 40 years.

The slump comes as global trade dropped a full 10 percent in the latter part of 2008. That suggests there could be still less foreign orders for German cars and machinery in the coming months.
Now the issue that the Germany taxpayer thinks about is: 'Do I want to put my tax dollars as the backstop for Greek fiscal irresponsibility?

Edwin Collier, a professor at the JFK Institute for North American Studies at the Frei Universitaet Berlin, says that much of Germany's export production is machinery for infrastructure projects. And infrastructure projects get postponed in difficult times.

"It's particularly in the kind of demand for goods, for investment goods, where there is this postponibility that firms have, that governments have, when they do infrastructure and when everybody decides to take a time out and reflect about where the world economy is going that is really bad for those who are producing these capital goods like Germany does," he says.

Helping Others To Help Germany

The drop in exports is one of the most painful blows to the German economy since the global crisis began. And it raises again questions that have dogged Berlin from the start:

Can Germany continue to resist requests from its harder-hit EU trading partners for assistance in rescuing their economies?

Or will Germany's own economic interests require it to help its trade partners because their weakness, in turn, reduces the market for German exports?

The requests for help have taken the form of calls, for example, for an EU-wide bailout fund for distressed banks. There also have been calls for creating Euro-bonds backed by all eurozone countries to help attract new investment.

But German voters, who feel they did not create the economic crisis, do not feel responsible for cleaning it up. They fear that, as the EU biggest economy, they would have to shoulder the lion's share of funding the bailout.

And, Collier says, German political leaders are well aware of the voters' sentiments:

"Germany has been keeping a fairly close reins on its fiscal situation. So, of all the countries in Europe at the present time that can afford to stimulate the economy -- to serve as backstop for other economies, provide guarantees so that things don't plummet further -- Germany is actually positioned much better for this," he says.

But he adds: "Now the issue that the Germany taxpayer thinks [about] is: 'Do I want to put my tax dollars as the backstop for Greek fiscal irresponsibility?' -- as it is often characterized. That's a political and economic question of the first magnitude."

How Germany answers the question is not only important for the eurozone countries or even the EU. It is increasingly pertinent for Central and Eastern Europe, where many countries also hope for some united EU action to help stop their downward slides.

Germany has strong economic ties with Eastern Europe, including Russia. The region is more important as an export destination for Germany than is the United States.

Eastern European Crisis

But so far, the eurozone countries, with Germany in the lead, have left the job of helping countries outside the zone to the International Monetary Fund (IMF). The Fund -- which already has provided money to Belarus, Hungary, Iceland, Latvia, Pakistan, and Ukraine -- now is fast approaching the limits of its $200 billion reserve.

As a fix, the leaders of Europe's largest economies agreed on February 22 to lead efforts to increase the funding for the IMF to at least $500 billion. That suggests Germany still wants to stop short of directly helping trade partners.

Still, Jennifer McKeown, a specialist on Europe's economies at London-based Capital Economics, says that if the situation in Eastern Europe sharply worsens, Germany might have to take the lead in putting together an EU Commission-backed rescue package to supplement the IMF.

"If the downturn is much sharper in emerging Europe, then obviously there is more call for support in that direction. And, given Germany's particularly strong trade links to those economies, then it would be relatively supportive [of direct EU help], I would think," she says.

But, the analyst cautions, that would only happen if the EU's own worsening situation does not make it the first priority for concerted EU action, instead. The EU is Germany's biggest trade market.

Right now, the mood in Berlin remains isolationist. German Chancellor Angela Merkel faces parliamentary elections in September. With the government now predicting a rapid rise in unemployment by 500,000 to 3.5 million, it may not be the time to look beyond the domestic arena.

Yet the pressures on Germany to look across its borders are only likely to grow in the months ahead.

After all, if there are any simple lessons from this economic crisis, here is one of them: politics may still be local, but economies are global.

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