The latest ZEW index, which measures German business sentiment, fell unexpectedly in July compared with the previous month on the back of lower export figures and the continuing euro crisis.
“The ZEW index fits into the current picture that the German economy looks like a grab bag, which has something for everyone,” says Carsten Brzeski, Brussels-based chief economist with the Belgian bank ING.
“For the optimists, there is the strong labour market, solid private consumption, strong construction growth, and confidence indicators at high levels. At the same time, however, there are dropping new orders, disappointing exports, and the continuing euro crisis for the pessimists.”
The German elections are scheduled to take place on Sept 22. The complexion of the economy will have a huge sway on the outcome, although it looks as if the incumbent, chancellor Angela Merkel, is set for another term in office.
The main threat to the German economy is a sharp slowdown in China, which would weigh on demand for capital goods. If there is a sharp deterioration in the world’s second biggest economy, then it would make Germany more reliant on its traditional trading partners, particularly the rest of the eurozone.
However, the eurozone remains mired in a deep recession. There has been speculation that the reforms needed to stoke growth in the region have been sidelined by Berlin until after the election.
Janis Emmanouilidis, a senior policy analyst at the Brussels-based think tank, the European Policy Centre, says Ms Merkel did enough over the past 12 months to ensure that the state of the eurozone economy did not become a pre-election issue in Germany.
Over the past few weeks, the German government has opposed key elements of the proposed banking union, including plans for a single resolution mechanism and a deposit insurance scheme. Moreover, Berlin opposes a direct recapitalisation of the banks through the ESM or anything that resembles a transfer union, said Mr Emmanouilidis.
“It cannot be seen to betray the German taxpayer, but that may change after the election and some of its red lines may become a little less reddish.”
However, it is unlikely any sort of political configuration after September’s election will agree to a transfer union, he added.
Concerns about the imminent demise of the single currency that prevailed for much of 2011 and the first half of 2012 have died down following an unprecedented level of activism by the ECB. However, the crisis still persists at member state level that could still flare up and threaten the viability of the euro.
While Germany remains implacably opposed to a transfer union, it has softened its stance towards more growth-enhancing measures, which could soften the impact on these countries, added Mr Emmanouilidis.
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