Not so long ago, Germany was considered the engine of the EU
economy. When things went wrong for other countries in the bloc, there was
always the hope that Berlin would come to the rescue.
But now, it seems that the safety net is slowly deflating:
the country’s industrial production has fallen below 2017 levels, and the
threat of recession is more real than ever, although the DAX seems to be
holding steady. The pressure on the European Central Bank (ECB) has prompted
rate cuts, with potential for further reductions, which could lead to a reversal in the EUR/USD
trend even if the Fed cuts rates.
The silver lining for markets is that the European Central
Bank (ECB) has repeatedly cut rates, citing Germany’s recession risk. The
regulator took similar measures in 2001, 2002, and 2011.
So, how did Germany get into this situation?
The problem lies in a business model that depended
on cheap energy from Russia, low-cost subcontractors in Eastern Europe, and
ever-growing exports to China. Now, all this has disappeared.
Sanctions against Russia and the destruction of the Nord
Stream pipelines have driven energy costs through the roof, leaving many
companies unable to survive or at least struggling to do so.
The number of German companies heading for insolvency soared
in the first half of 2023, reaching its fastest pace in over two decades with
8,400 corporate insolvencies.
Since then, the situation has not improved much: the number
of large insolvencies in Germany reached an all-time high in the first six
months of 2024, with an increase of 37%, according to Allianz Trade.
The credit insurer forecasts
21,500 bankruptcies of German companies of all sizes for the entire year,
an increase of 21% following a similar 22% rise in 2023.
Recently, Volkswagen announced the closure of several
factories and the layoff of 15,000 employees, sparking street protests over
factors such as over-regulation, inadequate infrastructure, shortage of skilled
labor, etc.
It should be noted that the problems are not only due to
electricity prices, which remain high compared to a few years ago but also to
the high interest rates that the regulator imposed to combat inflation.
Companies are still finding it challenging to repay COVID-19
loans or find new financing, and even with two ECB rate cuts, no miraculous
improvement is expected in the coming months.
In addition, deteriorating EU-China relations and the
latter’s complex economic environment have led to a drastic
decline in German exports to Beijing.
In the year’s first half, German exporters sent more
products to Poland than China. As expected, total exports decreased by 1.6%
compared to last year’s period.
Where does it lead?
If Germany fails to get back on track and its recent
stimulus measures do not help to reduce the number of bankruptcies, the ECB
could increase its dovish stance and cut rates further.
In the latter case, the EUR/USD could reverse its trend even
with the Fed cutting rates.