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  The End of the Upswing: Bad News Keeps Coming for the European Economy

The End of the Upswing Bad News Keeps Coming for the European Economy

By Alexander Jung and Michael Sauga

Part 2: Germany's $1.5 Trillion Export Market at Risk

Since the start of the decade, German exports have increased by 62 percent to a total annual value to €969 billion ($1.5 trillion). The percentage exports comprise of Germany gross domestic product has also risen rapidly in the past 15 years, from 24 to 47 percent. At no point in German history has the country's economy been as dependent on exports as it is today. When globalization is working to Germany's advantage as it did in recent years, it helps the economy. But if global markets are paralyzed by financial crises, then Germany's economy because disproportionately vulnerable.

Emerging economies like China and Russia prefer German companies when ordering major heavy machinery -- like power plants or petro-chemical equipment. Indeed, German exports to Russia increased by 25 percent during the first quarter and by 19 percent to China. But in absolute numbers, these new economic powers do not play a prominent role in German exports. And they're not nearly enough to offset the possible shortfall in exports in Germany's own backyard in Europe.

During the first quarter of this year, Germany exported €7.5 billion worth of goods to Russia, but it exported three times that much to France (€25.1 billion). And the €7.9 billion worth of goods it exported to China is modest compared to the close to €17 billion in goods it sold to neighboring Holland.

'Very Volitile'

Indeed, Germany's partners in the European Union remain its most important trading partners, with close to two-thirds of all its exports going to member states. But now Germany is facing difficulties in its most-important market. The last time the purchasing managers index (PMI) -- a reliable barometer of the current economic mood in the euro zone -- was as low as it is now was back in November 2001. Expectations for the service industry have fallen the most.

Great Britain has already fallen into a recession, and German exports to the country are already dropping. Exports to Italy, which has lost competitiveness because of high labor costs, have also dropped. Economic prospects in France are also growing cloudy, and businesses there haven't been as pessimistic as they are now in a decade. Meanwhile, in Spain, the real estate crisis is threatening to pull the entire economy down with it. The economies of Germany's neighbors in Europe are losing their umph and German export firms are sharing their pain.

Much suggests that when Germany's parliament returns from its summer break, it will be returning to a completely different reality. And the threat of an economic downturn is likely to have a widespread impact on the government -- both on the budget and the campaign for 2009 elections. The troubled economy is also likely to fuel a debate in Merkel's conservative Christian Democrats to move quickly to cut taxes.

The chancellor also know this. Just before leaving on vacation last week, she said she would do some fresh thinking about the state of the global economy during her holiday. After all, she said, political developments these days are "very volatile."

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