Is Germany about to lose some of its bargaining chips with the euro zone?
Unless you've been living in a cave, you should know that Germany is usually calling the shots on fiscal matters in the euro zone. One reason is that Germany is the biggest and best performing economy in the region. Consequently, it's also one of the more significant contributors to the region's bailout mechanisms like the EFSF and ESM.
With bargaining chips like that, it's no wonder why Germany isn't shy about throwing its weight around when it comes to making or refusing changes in the region's austerity and growth measures.
Recent economic reports suggest, however, that Germany is starting to show cracks in its armor as well. Here are only some of the reports that were printed lately:
As you can see, the reports either came in worse than projected, showed a decline, or portrayed pessimism in Germany.
What's concerning about the data is that if Germany isn't there to pick up the slack of other economies, it could have a two-fold effect on its participation in the ESM.
First, a drop in German activity could negatively affect other euro zone countries, many of whom rely heavily on German demand to fuel their economies. If Germany struggles, it may force them to tap into the ESM to keep their economies afloat.
Second, Germany may argue that because its economy is struggling as well, it may not be able to contribute as much as it used to for future bailouts. Furthermore, German leaders may even demand stricter austerity measures for any country looking to request for a bailout, just to ensure that it's money is put to good use.
A downturn could also exacerbate the worsening sentiment towards the euro zone. With Germany starting to show cracks in its armor, it could put a damper on any optimism that the region was moving one step closer to solving the crisis.
For now, we'll have to watch out for more data to see what direction the German economy is truly headed in.
Here are some reports scheduled for release over the next month that you should keep an eye on:
- German Retail Sales (October 30)
- German Unemployment Change (October 31) German Preliminary GDP (November 15)
I'd pay special attention to the GDP report, as this will hint to us whether or not Germany is about to enter a recession. If these reports indicate that the euro zone frontrunner is in trouble, don't be surprised if we see risk aversion take over the markets!