Europe’s economy has thus far been buoyed by the success of Germany, and going forward Europe needs as much economic growth as possible in order to deal with with debt and budget deficits in its peripheral nations.
However, Germany’s economic growth has substantial headwinds going forward due to the renewed weakness in the U.S. dollar, and oddly, the new Basel III international regulations out of Switzerland according to Irwin Stelzer, the director of economic policy of the Hudson Institute.
For one thing, its exports are likely to be hurt by the U.S. slowdown and the recent fall in the dollar. For another, German banks will have to reduce lending sharply, by an estimated one-third in the case of local banks—to conform to the new Basel III capital-adequacy rules.
In fact, German’s finance minister has already warned that 2011 GDP growth won’t match the 3%+ rate likely to be achieved this year. While the U.S. dollar could bounce back, and the euro could weaken, thus reversing one of the issues above, Basel III regulations are a done deal.