No Bounce for Europe in Rebound by Germany

http://www.nytimes.com/2013/09/04/business/global/no-bounce-for-europe-in-rebound-by-germany.html

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FRANKFURT — Whenever Germany thrived, so did the rest of Europe. But that long-held belief is being questioned by its neighbors, which see evidence that the country is taking off without them.

Despite Berlin’s hefty financial support of the euro zone’s more beleaguered members in the last few years, the economic crisis has corroded commercial ties between Germany and the rest of Europe. Countries like Italy and Spain no longer have the purchasing power they once did, and they trade less with Germany because of it.

Greece, the most distressed country in Europe, is now little more than a German rounding error. German exports to Greece plunged 40 percent from 2008, while Germany imported 9 percent less from Greece. Last year, Greece ranked 44th among German trading partners, just behind Vietnam.

No wonder German companies, cheered on by the government of Chancellor Angela Merkel, have turned their attention to faster-growing places like Asia or the United States.

“Right now it’s a decoupling story rather than a helping-hand story,” said Carsten Brzeski, a senior economist at the Dutch bank ING.

It is not simply an economic issue, but a geopolitical one.

Ms. Merkel is running for re-election this month in a campaign in which one of the few debating points is how many more financial handouts Germany will give to its weaker neighbors. She has made a conscious effort of building closer ties with bigger and faster-growing markets like China. If the Merkel government succeeds in making Germany a bigger global player through trade and investment policy, it not only insulates Germany from European structural woes but also ensures that it remains a global economic force in its own right.

For the rest of the euro zone and the larger European Union, however, unity depends on the sustained energy and commitment of Germany, the wealthiest and most powerful member. The more that Germany sees its long-term interests lying outside Europe, the less certain the future of the entire European project.

“Germany is less willing to play ball,” said Stefano Micossi, director general of Assonime, an Italian business group and research organization. Rather than pulling together, he said, European leaders have been “falling back to mutual mistrust and national solutions.”

On Tuesday, the Organization for Economic Cooperation and Development said that even as Germany resumed growth, the euro zone’s most vulnerable countries were unlikely to follow until sometime next year. European banks remain weak, the group said, while lending — usually considered a prerequisite for economic growth — continues to decline.

The euro zone’s economic future remains heavily dependent on Germany, the biggest market for products like shoes from Italy or Ford minivans made in Spain. German companies like Linde, a large supplier of gases for use in industry and health care, are major employers in Southern Europe.

But Linde’s big growth this year was in the United States, where sales rose 58 percent in the third quarter, to $2.6 billion, thanks to the purchase of Lincare, a company that supplies oxygen to patients in their homes.

The United States has also become a hot market for German companies like Voith, a maker of industrial equipment, which said last month that it expected to profit from a new law intended to encourage construction of hydroelectric power plants. Voith issued a statement calling the new law “terrific news” — no surprise considering that the company is one of the world’s largest suppliers of hydropower equipment.

In addition, China has become the most important market for Volkswagen, which sold 1.5 million cars there in the first six months of this year, more than in Western Europe. Volkswagen is also putting renewed emphasis on North America. In 2011, it opened a factory in Chattanooga, Tenn., that contributed to a 10 percent increase in American sales through June from a year earlier.

“It’s kind of natural that Germany has to look for new trading partners,” said Wolfgang Lechthaler, a senior researcher at the Kiel Institute for the World Economy in Kiel, Germany. Even if trade with the rest of Europe recovers, “many business relations are also long-term relations,” he said. “It might not go back to the same level as before.”

German annualized growth of 2.9 percent in the second quarter of this year lifted the average for the euro zone as a whole and, at least on paper, ended a regional recession that began in 2011.

But a closer look at the numbers shows a big gulf between growing, northern-tier countries like Germany, Austria or Finland and southern countries like Spain, Italy and Greece, which continue to contract, albeit at a more moderate pace than before. The divide makes for tricky navigation by the European Central Bank, which will hold its monthly monetary policy meeting on Thursday, as it tries to promote growth in the ailing countries while heading off inflation in the healthier ones.

“Average data for the euro area disguises some divergence,” Jörg Asmussen, a member of the executive board of the European Central Bank, acknowledged in an interview in Berlin last week. “You have some countries with robust growth. On the other hand, you have countries that are deep in recession.”

The question now is whether German companies might rediscover some of their traditional markets in Europe, given the tentative signs of stabilization. Economic output in Spain, Italy and Greece shrank but at a much slower pace than in previous quarters. Unemployment fell slightly in Spain and Italy, though it continued to rise in Greece.

If the southern-tier European countries recover, they could once again become attractive places to do business or produce goods.

Despite the strains on European unity, the shared currency as well as a relatively homogeneous legal system could eventually work in favor of the most stricken countries. And even with the growth of trade with China and the United States, Germany’s largest trading partner is still France, with which it did 169 billion euros ($223 billion) in import-export business last year.

“Europe plays a completely different role than China,” said Karl-Heinz Paqué, a professor of economics at the University of Magdeburg in Germany. “It’s not only trade links, it’s also deep integration.”

It will take more than help from Germany to reduce unemployment in Spain and Greece to tolerable levels. The General Confederation of Workers of Greece, a research institute tied to Greece’s largest labor union, concluded in a study leaked this week that Greek unemployment could require two decades to fall to 10 percent from nearly 28 percent today.

Mr. Asmussen of the European Central Bank said it would take years to fix the imbalances that led to the euro zone crisis, which include excess debt and loss of competitiveness by the stricken countries. “The probability of catastrophic events has been drastically decreased,” he said, but Europe still faces “an adjustment decade.”