Government Holds Firm in Germany in Face of Weakening Economy

http://www.nytimes.com/2014/10/18/business/international/government-holds-firm-in-germany-in-face-of-weakening-economy.html

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THE German economy is weakening, as a new European credit scare seems to be arriving. But the German government and central bank seem to see no reason to do anything to stimulate the economy.

This week, the German Economy Ministry shaved its forecasts of economic growth, and the government reported that manufacturing in August was 2.4 percent below the level a year earlier. A survey of manufacturing firms found that in September more of them reported that new orders were falling than said orders were gaining. Not since late 2012 had that survey been so negative.

This week, the widely watched ZEW survey of financial market experts indicated that more of them expected the German economy to decline over the next six months than expected it to improve. Earlier this year, a vast majority of them were optimistic, as Germany seemed to be growing at an adequate rate even as other European countries were struggling.

Now, however, interest rates on government bonds in some European areas are rising rapidly, as investors lose confidence that Mario Draghi, the president of the European Central Bank, will be able and willing to do “whatever it takes” to spur growth and keep a new crisis from arriving.

Many had expected that Mr. Draghi would unveil a new initiative at the annual meeting of the International Monetary Fund in Washington, and there had been speculation that Germany might opt for some fiscal stimulation as its own economy began to sputter. But Mr. Draghi has had little to say, and Angela Merkel, Germany’s chancellor, was reported to have ruled out stimulus at a meeting of the governing Christian Democratic Party.

The jitteriness of markets in Europe may also reflect worries that the results of the European Central Bank’s review of the health of major banks, expected to be released Oct. 26, will show that some of them need more capital than had been expected.

The decline in manufacturing reported this week may reflect changes this year in vacation schedules in Germany, but figures for other countries were also weak, with manufacturing output falling in France and Finland and remaining level with a year earlier in Italy.

Over all, industrial production, which also includes production of energy and mining, was down 3.1 percent in Germany on a year-over-year basis. That dragged the overall eurozone to a decline of 0.8 percent. Chris Williamson, the chief economist at Markit, said the disappointing numbers “add to the chances that the eurozone could see a drop in G.D.P. in the third quarter after G.D.P. stagnated in the second quarter.”

In a speech to the American Council on Germany in Chicago this week, Andreas Dombret, a member of the executive board of the Bundesbank, Germany’s central bank, pointed to the weakening economic statistics but did not counsel that either fiscal or monetary policies should be used to stimulate economies.

Instead, he focused on the need to make it easier to do business in Europe, including making it easier for employers to hire and fire workers. “To me,” he said, “there can be no doubt. For the euro area to take off, we need to follow through on structural reforms.”