After German business confidence fell for the fifth month, is the euro crisis about to return?

YES
Ferdinand Fichtner

The Eurozone is already in the middle of a recession. Production has declined since the summer of 2011 and unemployment rates are increasing in almost all euro members. In the last quarter, Germany was the only country that had a relatively solid growth record. But, looking forward, the picture remains gloomy. Growth in emerging economies like China has been weak lately, and the US economy is facing strong headwinds due to the need for fiscal consolidation. Slowing demand from abroad will hurt European exports on top of already weak internal demand. The chances are that solid growth will return relatively quickly (perhaps as early as mid 2013) in countries like Germany or the Netherlands. But, in the crisis countries, the situation remains bleak. It looks more and more likely that the economic situation will remain weak for the next five to ten years, resulting in even higher unemployment and social unrest.

Ferdinand Fichtner is chief economist at DIW Berlin.

NO
Chris Walker

It is hard to argue against the claim that the latest Ifo estimates of German business sentiment are disappointing. The business climate sub-component registered its fifth consecutive decline, while the forward-looking sub-components indicate that confidence in German industry remains in decline. However, putting this survey in context is important. Firstly, the headline number remains above its long term average and overall prospects are relatively robust compared to most other Eurozone members. Moreover, 50 per cent of the responses came before the German constitutional court’s European Stability Mechanism (ESM) ruling. While a favourable result to the ruling was already priced into financial markets, uncertainty at the time of the survey would likely have still added an extra negative premium to business sentiment. This has now, of course, been removed.

Chris Walker is a currency strategist at UBS.