'Fear and Uncertainty': The Euro Endangers German Economy

The common currency union was supposed to benefit the economy of the entire European Union. Now that the euro is struggling, however, it is bringing growth down with it. Germany's economy, once seemingly immune to the crisis, is now facing mounting difficulties. By SPIEGEL Staff

Containers at the port of Hamburg. Worrying indicators for the German economy are mounting. Zoom
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Containers at the port of Hamburg. Worrying indicators for the German economy are mounting.

When the board of Commerzbank met last Tuesday, Stefan Otto was supposed to make an appearance. The chairman of Deutsche Schiffsbank, a Commerzbank subsidiary based in Hamburg that is focused on the shipping industry, had been summoned to Frankfurt to present the bank's financial results. But the presentation was cancelled; Commerzbank had no need for the numbers, having previously decided it no longer wanted anything to do with German shipping.

The executive board of Deutsche Schiffsbank was not notified in advance of the parent company's reversal. The supervisory board was also taken by surprise. Only three months earlier, Commerzbank CEO Martin Blessing had declared the financing of ships and commercial real estate to be part of the bank's core business. And although it was expected to shrink, Germany's second-largest bank intended to create a separate segment for the business.

But the executives had underestimated the risks that the European sovereign debt crisis presents to Commerzbank, and how much capital the ship and commercial real estate business ties up. Now Blessing has slammed on the brakes. Deutsche Schiffsbank Chairman Otto characterized the parent company's about-face as the "decision of a cautious businessman and not of a skydiver."

Commerzbank has recently made a huge effort to satisfy and even exceed the capital requirements set by the European Banking Authority (EBA). But if the euro crisis worsens, new gaps could soon open up, say banking industry insiders.

Potential Defaults

In Spain alone, Commerzbank is exposed to the tune of €14.2 billion ($17.9 billion) via investments in banks, companies and the government. The lower the rating agencies assess the creditworthiness of these borrowers, the more capital the bank will have to place in reserve for these investments in the future -- to say nothing of potential defaults.

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Graphics Gallery: The Euro Crisis Threatens German Economy
Commerzbank isn't alone with such problems. The euro crisis and the higher capital requirements being imposed by regulators have adversely affected almost all European banks. And because of growing fears within the banks of a collapse of the euro zone, they are preparing for the worst by withdrawing to their home markets and winding down many investments.

This has serious consequences for the economy, not just along the periphery of the euro zone, but also in Germany, which had proved to be crisis-proof and was in fact booming until recently.

Companies had been banking on the assumption that growth in emerging economies would offset weakness in the euro zone. But now even those markets are no longer as promising. Growth is weakening across the board in the emerging markets, a Citigroup study concludes.

Last week, chipmaker Infineon shocked the industry when it issued a profit warning. Siemens CFO Joe Kaeser told investors that tougher times are ahead, and even economists are slowly abandoning the conviction that Germany could remain an island of the blessed in a sea of crisis-ridden euro-zone countries.

The German economy will stagnate by this fall because of the euro crisis, Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, said recently. The Macroeconomic Policy Institute (IMK) sees the German economy stagnating both this year and next. "The crisis in the euro zone, the strict austerity policies and the associated recession in many EU countries" have taken hold of the German economy, says the IMK. The economists at Citigroup expect a recession in the euro zone in 2012 and 2013.

'Serious Implications'

In a situation reminiscent of the autumn of 2008, after the bankruptcy of investment bank Lehman Brothers, ailing banks are infecting the rest of the economy. "Cross-border financing is declining in Europe," says Michael Keller, managing partner of the Frankfurt-based management-consulting firm Keller & Coll.

Investment bank Morgan Stanley says that Europe's banks are undergoing a "Balkanization" that will have "serious implications" for the availability of loans and for growth in some countries. The euro, which was intended to stimulate growth in Europe, is becoming a divisive force in the crisis.

Particularly along the edges of the EU, weakened banks are bringing companies down with them. "Companies are only doing business in the peripheral countries of the euro zone if they can obtain the necessary financing locally," says consultant Keller.

But the Deutsche Schiffsbank example shows how problems in the financial sector could also infect the rest of the economy in Germany. The bank no longer wants to lend any fresh money at all to shipping companies. The roughly €20 billion in shipping loans still on the bank's books are to be reduced to zero, and even good customers are finding it difficult to extend their loans.

There is growing displeasure within the German government, which owns 25 percent of Commerzbank. Although he doesn't want to criticize the decision, says Hans-Joachim Otto, a member of the pro-business Free Democratic Party (FDP) and the federal government's coordinator for the maritime economy, "I am, of course, not delighted; this is an inopportune signal." Ship owners are already finding it very difficult to borrow money, because other banks are also turning them down. But for Otto, the shipping industry's borrowing dilemma is only part of a more serious problem. "It's becoming increasingly clear that all long-term projects have financing problems," says Otto. "This affects the energy turnaround, infrastructure investments and extraction of raw materials" -- all areas that are expected to contribute to future growth.

Nevertheless, Germany's showcase industries until recently seemed unaffected by the euro crisis and weak growth in other countries. The auto industry, on which one in eight jobs in Germany depends, has sailed through 2012 so far, as if it were invincible. BMW, Daimler and the VW Group are reporting record sales and profits. Mercedes-Benz sales and marketing chief Joachim Schmidt says that in 2012 his brand will "sell more vehicles than ever before."

Not the Whole Story

The three companies owe their strength to two unique factors. First, they generally produce cars for the somewhat higher price segment, in which demand is not as heavily dependent on the economy. Most of all, however, they have benefited from the growth markets in China, India, Russia and Brazil.

But that's not the whole story. The industry also includes Opel, a subsidiary of US auto giant General Motors. Opel employs more than 20,000 people at its plants in Kaiserslautern, Eisenach, Bochum and Rüsselsheim. And because Opel does almost all of its business in Europe, the company has been hit hard by the crisis. Sales are plunging, losses are growing and it seems inevitable that Opel will have to cut several thousands jobs in Germany in the coming years and perhaps even close its plants in Bochum and Eisenach.

The crisis has also affected VW. Its Spanish subsidiary SEAT faces problems similar to Opel's, with SEAT selling almost exclusively in Europe. The brand, which has accumulated losses of almost €1 billion in the last five years, faces an uncertain future. VW is still reluctant to draw the consequences and close the SEAT chapter, but if the crisis continues in Europe, the company will hardly be able to avoid it.

German mechanical engineers are likewise no longer particularly optimistic. "Of course we sense the reluctance to spend money in the euro zone," says Olaf Wortmann, an expert on the economy with the German Engineering Federation (VDMA). Some investors have become wary and are postponing contracts, Wortmann explains. The decline in demand in the Chinese market has also had an impact on the industry, with German machine builders seeing a 9 percent year-on-year decline in new orders for the period of February to April.

While the main objective last year was to be able to guarantee fast delivery, "price has played a stronger role once again in negotiations in recent weeks," says Hans-Gert Mayorse, chairman of Gesco, a medium-sized holding company. For now, however, Gesco does not anticipate a crisis like the one that occurred in 2009, when many companies had to apply for short-time work benefits -- at least as long as the euro zone doesn't collapse, says Mayorse.

'Filled with Fear and Uncertainty'

The euro crisis hasn't yet reached the German labor market. Last week, Frank-Jürgen Weise, head of the Federal Employment Agency (BA), announced a new jobless low: With 2.8 million people out of work, the unemployment rate had declined to 6.6 percent, the lowest level in 21 years. But in the economic cycle, the labor market is considered a "trailing" indicator. In other words, when things go up or down in the economy, it takes up to six months before jobs are affected.

Indeed, even though the German job market remains robust, BA head Weise says he sees "signs of weaker development." Month after month, the BA surveys all 176 employment agencies throughout the country about early indicators, so as to forecast labor market developments for the coming months. According to these indicators, the jobs situation will not deteriorate until autumn. But "we are nervous about 2013, because of all these risks relating to sovereign debt in the euro zone," says BA chief Weise.

Fears of job cuts are already spreading at Commerzbank. More than 1,000 employees work at the Eurohypo real estate bank and at Deutsche Schiffsbank, both of which are now to be liquidated. Labor representatives are pushing for talks with management.

More moves, however, may be on the way. The executive board is subjecting all areas to a strategic review. "The hallways are filled with fear and uncertainty," says a Commerzbank employee.

BY MARKUS DETTMER, KATRIN ELGER, DIETMAR HAWRANEK, MARTIN HESSE and ISABELL HÜLSEN

Translated from the German by Christopher Sultan

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