Austerity is turning Germany into a basket case too

Now industrial production and export orders are declining even in Europe's powerhouse, as the austerity Berlin demands stifles its customers' spending

German steelworkers: the country's industrial production fell by 2.9% in December. Photograph: Ina Fassbender/Reuters

Posted by

Larry Elliott

Wednesday 8 February 2012 18.39 GMTguardian.co.uk

Exports down by 4.3% in December. Industrial production down by 2.9% in the same month. An economy on the skids? It certainly looks that way. Are we talking about Greece? No. Portugal? Think again.

The economy in question here is Germany, which has started to post the sort of data that smacks of a double-dip recession in Europe's biggest economy.

Consider the evidence. Germany is an export-driven economy but its main markets – the rest of the eurozone, the UK, the US, China – have all seen a sharp slowdown in growth in the second half of 2011. During that period, the most significant German export was austerity, which has now come back to haunt Berlin through diminished demand for the industrial goods produced by the Mittelstand. Total export orders were almost 9% lower in the final two months of 2011 from their peak in June-July.

But the domestic economy is also suffering. Imports were down by 3.9% in December, so there is little hope that countries like Greece can export their way out of trouble, even if they accept the terms of their new bailout from the European Union and the International Monetary Fund.

Germany has already admittted that it is on course to suffer a drop in gross domestic product of around 0.25% in the fourth quarter of 2011, although the figures for industrial output and exports released this week suggest the drop may be bigger than that. Order books are weak, which suggests that the downturn could persist into the first three months of 2012.

All of which illustrates why Angela Merkel is growing increasingly impatient with Athens over the failure to sign off on the new austerity plan. Germany can ill afford an intensification of the Greek crisis, especially if there are ripple effects across the rest of Europe.

Clearly, the lesson that should be learned from Germany's renewed flirtation with recession is that there needs to be a crash rethink of blanket austerity – a strategy that is sucking demand out of the European economy and making it harder to bring down budget deficits.

Germany may, however, decide that the moral of this story is that it is suffering too high a price for keeping the single currency together – and that the stragglers need to be cut loose, perhaps once the French presidential election is over.