Germany's Exports and the Euro

Reichstag Parliment building, Berlin, Germany
Martin Child | Photodisc | Getty Images
Reichstag Parliment building, Berlin, Germany

Germany's export partners are ailing, and that's bad news for Europe's biggest economy.

If you think of Germany as the strong man of Europe, you're probably right. But there are growing signs that the country's export-driven economy is facing serious headwinds.

"Germany remains export-dependent – much as it has been for some time - and its major market, its immediate neighbors, are suffering a downturn whose end, though frequently alluded to, probably remains some way beyond the horizon," wrote Neil Mellor, a senior currency strategist at Bank of New York Mellon , in a note to clients.

It gets worse. "When German GDP collapsed by 5% in 2009, trade was the principal catalyst," Mellor continues, "and the German economy is as vulnerable now as it was back then."

How bad are things really? In the second quarter, exports contributed just 0.3% to German GDP, down from 0.7%. Various economics experts are cutting their growth forecasts for Germany. And Mellor points to "the OECD’s recent forecast which points to outright recession at the start of next year."

Germany's weakening export activity is no doubt directly tied to the troubles its nearest neighbors are facing. But that relationship creates a vicious cycle: a downturn for Germany's neighbors cuts demand for German products, which hurts the Germany economy and intensifies pressure on the government to stand firm against demands for aid to troubled countries. And so on.

That means this export weakness is not just grim news for Germany: particularly with German elections looming, it's also bad for the euro zone as a whole, and possibly the euro too.

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