Here's Why Germany Is The Big Winner In The Eurozone

According to an Oct. 21 official report, the German government has revised its economic growth forecasts for 2010 upward from 1.4 to 3.4 per cent, putting Germany’s economic performance well ahead of the eurozone’s expected performance of just 1.7 per cent growth.

Two reasons explain why the German economy is outperforming the rest of the eurozone. First, Germany is currently benefiting from a favourable demographic dynamic conducive to high productivity. Second, the lingering economic and political concerns in the rest of the eurozone are weighing on the euro, making German exports all the more competitive. While these two factors will continue to help the economy of Germany — Europe’s economic engine — Germany’s economic performance threatens to undermine its efforts to reform the eurozone and European Union.

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Germany is relatively unencumbered by expenditures on youths and the elderly, two non-economically productive groups. This is because the bulge of Germany’s population is in the most productive working age cohort of around 35 to 55 years old. Germany will remain in this prime demographic position at least for this decade.

The weakness of the euro, whose troubles show no signs of abating anytime soon, is explained by a number of factors. Perhaps most important is civil unrest on the back of unpopular austerity measures that threatens to roil Europe’s respective political establishments. Lingering fears about economic and political stability in the eurozone’s periphery and, recently even its core, will continue to weigh on the common currency. Germany’s goods are so competitive that that they normally sell even when its currency is strong; a cheaper euro thus will only further sharpen German exporters’ unrivalled competitive edge.

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While both factors will boost the German economy in the short term, they have their drawbacks.

First, the current demographic bulge will, of course, eventually reach retirement age. This will strain the system down the line, though Germany will have enjoyed a multi-year boost of economic growth while its fellow EU countries struggle.

Second, and more immediately, the austerity measures Germany plans for the eurozone will continue to weigh on the economic performance and political stability of Germany’s fellow eurozone members. As Germany is primarily responsible for insisting upon the austerity measures that are causing this economic and social pain, good news about Germany’s economic recovery is liable to make the rest of the European Union resent Germany. If the notion that Germany’s calls for austerity have less to do with eurozone stability and more to do with boosting the German economy takes hold, it could threaten Germany’s eurozone austerity plans and reverse Europe’s current tenuous political consensus and relative economic stability.

*This report is reprinted with permission of STRATFOR. It may not be reprinted by any other party without express permission of STRATFOR.

To learn more about STRATFOR, click here.

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