The Ripple Effects Of A Slowing German Economy

by: Investment U

By Jason Jenkins

Here’s the opening statement of the press release given by the German Statistical Institute on August 16:

The momentum with which the German economy started into 2011 has slowed down considerably. In the second quarter of 2011, the gross domestic product (GDP) rose just 0.1% – upon price, seasonal and calendar adjustment – on the first quarter, as reported by the Federal Statistical Office (Destatis). The result for the first quarter of 2011 was slightly corrected downwards to +1.3%.

And by the way, France had a second-quarter growth of zero. News of this nature could translate into negative growth numbers across the Eurozone.

The significance of the weaker-than-expected numbers can’t be overstated enough.

Germany is the focal point of the entire European Union. The Union only survives if Germany provides a strong foundation in the midst of an era of austerity, highlighted by the legislation passed in Greece and Italy. A German recession may automatically spell the end of the EU. This is a tangible possibility, as the German federal elections are slated for the middle of next month. Polls show that more than half of Germany’s population wants out of the EU., and as we’ve seen in the United States lately, bad economic times equal ugly political battles.

A Four-Part Package to Increase Economic Cooperation

Later that day, a key meeting took place between the German and French heads of state. It was thought that they would reach some sort of agreement to ease the markets. However, the result was a joint proposal of a financial transaction tax, hopefully implemented in September. The two leaders revived the tax discussion as one aspect of a four-part package they proposed as a means to increase economic cooperation.

Last September, EU finance chiefs failed to agree on a very similar tax, which the German Chancellor advocated in order to help repair the damage to national budgets caused by the banking crisis of 2008.

European Union leaders are attempting to restore confidence in a battered euro region as the sovereign-debt crisis that’s received so much press over the last year in Greece migrated to the third and fourth largest European economies – Italy and Spain.

A tax on financial transactions appeals to politicians because it could generate revenue without levying more burdens on individual taxpayers or the country’s economy. There’s also hope that the tax would serve to reduce market speculation.

The Financial Sector Isn’t Very Happy

What does the financial sector say? They’re not too happy.

European banking and exchange shares took big hits the day after the announcement. The feeling is that such a tax would be a big negative for the banks and exchanges, as trading volumes could go down by a great deal. The industry sees the political thought process behind the gesture of using tax proceeds as a hedge against future financial crises, however, they have a greater fear that even a small tax will result in a massive loss of market share in Europe versus the rest of the world.

How does this affect us on the other side of the big pond? This reeks of a European recession. If this is the case, you may want to be a bit wary of the technology sector. The S&P sector is most exposed to Europe from an earnings perspective. The Nasdaq 100 as a whole and companies like Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT) derive more than a third of their net income from Europe. This will get worse, so look for tech securities to take a big hit in the future.

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