Plunging Exports Economy Worst Since World War II Says Merkel

Angela Merkel said on Wednesday that the economy is worse than at any time since the end of World War II. Nobel Prize winning economist Paul Krugman says the chancellor herself is partially to blame.

In economic times like these, a little historical perspective can go a long way. That, at least, was the message delivered by German Chancellor Angela Merkel in an interview with the mass-circulation tabloid Bild published on Wednesday.

"In Germany, we have overcome other major challenges," she said. "This year we are celebrating the 60th anniversary of the Federal Republic of Germany and 20 years since the fall of the Berlin Wall. We succeeded ... in rebuilding after World War II and we tackled reunification following 1989."

But Merkel's other historical message in the interview was more to the point. "Such a recession, one which is taking place in all countries around the world, hasn't been seen since World War II."

The chancellor's warning comes after yet another flood of bad news for the economy. On Tuesday, the Federal Statistical Office announced that German exports, the motor behind the country's traditionally strong economy, have shrunk rapidly. Numbers for January show that, compared with the same month a year ago, exports are down by 20.7 percent. The drop is the steepest seen in 16 years.

Automakers and engineering firms were hit particularly hard. But the country's chemical industry has likewise been dragged down. Turnover in the sector plummeted by 11 percent in the fourth quarter of 2008 relative to the three months preceding it, said the VCI, which represent German chemical manufacturers, in a statement on its Web site.

In addition, the struggling mortgage bank Hypo Real Estate may once again be facing collapse. Berlin has already come to the assistance of HRE to the tune of over €102 billion ($130 billion) in the form of bailouts and guarantees. Now, according to the anonymous bank sources cited by the Süddeutsche Zeitung, the bank needs another €10 billion.

Time is short. According to the paper, HRE will be finalizing its 2008 balance sheet on April 24. A loss of several billion euros will be the likely outcome, meaning that the bank at present doesn't have enough capital equity to counterbalance the loss. The bank's board would, in such a case, be required to declare the bank over-indebted, thus paving the way to bankruptcy. And that would be difficult for the German financial system to absorb.

Indeed, Berlin has spent months trying to avoid just such an eventuality. HRE was the first of Germany's financial institutions to run into serious trouble as a result of the global financial crisis. Last October, the Merkel government put together a €50 billion bailout package for the bank, but that proved to be insufficient. Just weeks later, HRE became the first bank to take advantage of the €500 billion bank bailout bill passed by Berlin, likewise last October. The government has even agreed on a rule change that could allow it to expropriate the bank  against the wish of HRE's largest shareholder, the American private equity group JC Flowers & Co., which owns a 24 percent stake.

In the meantime, HRE has become just one of a number of economic fires Berlin is trying to put out. The carmaker Opel is struggling for survival and the economy faces significant negative growth this year. Indeed, despite two economic stimulus packages pushed through parliament in recent months -- worth over €80 billion -- some think that Germany isn't doing enough.

In an interview with the newsmagazine Stern to be published on Thursday, Nobel Prize winning economist Paul Krugman takes Germany, and Europe, to task for not doing enough.

Europe, he said, is stumbling. "I don't see any signs of unified activity, especially when it comes to financial policy," he said in the interview, which was only available in German. He was even more critical when it came to Germany's role in crisis management thus far: "Germany has so far been a huge stumbling block, a major hindrance." He pinned the blame on Finance Minister Peer Steinbrück, who he said is much too orthodox in his approach to economic stimulus.

When it comes to Merkel, Krugman said her response has not spoken well for her intellect.

cgh -- with wire reports
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