The German economy is losing steam, and it’s a good thing

The tide may be finally turning. Although analysts warn Chancellor Angela Merkel about further signals of a slowdown in Germany’s economic output, one such figure is to be welcomed: trade in July showed that the balance of the unabated engine of the euro zone is entering deficit territory with the rest of the common-currency region. As Italy and Spain reach surplus, the area is achieving a much needed correction.

Economists have repeatedly denounced that core countries’ banking system bear an excess of debt exposure to their southern partners because they were in fact financing trade deficits.

“This is part of the crucial rebalancing that has to take place within the currency union,” said Monday JP Morgan’s global strategist Dan Morris. “While cross-border financing is necessary for the euro zone as a whole to function, it has to be sustainable and it was not before. Now that relative labour costs have fallen dramatically, even to pre-euro launch levels for Spain and Greece, trade balances will improve and peripheral countries will require less external financing.”

Among these encouraging data, the investment bank highlights in its report Spain’s government bond yields falling down to the levels of last March.

According to JP Morgan, the City would be forecasting better times ahead for Spanish company earnings. “Estimates for earnings over the next twelve months rose 3.7% in November for the MSCI IMI Spain index and 7.9% for the financial sector. If the just-launched “bad bank” enables banks to begin lending again, economic growth will finally be able to recover.”

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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