Germany is already in a recession too

Edward Harrison here. Happy New Year to Naked Capitalism readers. You’ve probably seen this from early in the morning: Germany printed a negative GDP growth number for Q4. Here’s what I said earlier today at Credit Writedowns about this news.

As I predicted in a message to Credit Writedowns Pro subscribers on Monday, statistics have shown that the German economy has finally succumbed to the deflationary economic policy of the euro zone.

Germany showed first signs of feeling the pain from the euro zone’s debt crisis as the economy shrank in the last three month of 2011, despite outperforming its peers for main part of the year thanks to strong domestic demand and exports.

Gross domestic product (GDP) grew 3.0 percent in 2011, preliminary Federal Statistics Office data showed on Wednesday, below the previous year’s growth rate of 3.7 percent — the fastest since reunification — and in line with a Reuters poll estimate.

But GDP contracted by around 0.25 percent in the fourth quarter of 2011, an official from the Statistics Office added.

"Germany cannot isolate itself so easily from tensions within the euro zone. In addition the export sector is facing a difficult period given the fall in global demand," said Joerg Zeuner, chief economist at VP Bank.

I have been sounding the alarm bell since summer as this is something I said as early as March 2010 would eventually happen when the sovereign debt crisis became acute. Spain [and Italy]’s debt woes and Germany’s intransigence lead to double dip. That’s because Q1 will also be negative for the German economy, according to predictions from German market economists. So much for expansionary fiscal contraction.

The eurozone is in a recession right now. And it is the banking sector where downside risk lies. I stick by wrote in early October at the New York Times:

All indications are that Europe is already in a double-dip recession…The sovereign debt crisis and the fiscal consolidation implemented to deal with it have taken their toll.

None of the current signals indicate the situation will improve without policy support.


One would not be overstating the case in drawing parallels to the fateful events in 1931 that spread from the Austrian bank Credit Anstalt to the rest of the European banking system and into the U.S., creating bank runs and depression. Until the banks take substantially more credit write-downs and recapitalize, this crisis will continue and get worse.

All of the risk is to the downside here in my view. Will the US also double dip? What about China’s faltering housing and stock markets –can they prevent a hard landing? And what will this mean for investors?

I intend to address all of that today in this week’s newsletter on protecting your wealth in a world of recurring crisis and downside risk. I will have a lot more to say about the situations in Europe, the US, China, India and Brazil as well as on oil and Iran there. (Note: as I started the newsletter last Thursday and publish weekly, I will be on a six day schedule for a bit to push the publish date back toward the beginning of the week.)

Sign up is here for monthly or yearly subscriptions.

Source: Reuters

Also see: German negative yields as harbinger of deflation at FT Alphaville.

P.S. – This was Hans-Werner Sinn in September: “no, no, no, no, no, no, I don’t see a recession for Germany”. Are the chickens coming home to roost in the core or is this just a blip?

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. MyLessThanPrimeBeef

    No problem, recession or no recession.

    Just make sure the Dow is over 12,000. That’s what’s important to the 1%.

    It seems like it’s only when the Dow is at 8,000 that the 1% would think about doing something to stimulate the economy.

    So, don’t let a German recession worry you.

    1. Valissa

      A zen story for you MLTPB…

      In the Hands of Destiny

      A great Japanese warrior named Nobunaga decided to attack the enemy although he had only one-tenth the number of men the opposition commanded. He knew that he would win, but his soldiers were in doubt.

      On the way he stopped at a Shinto shrine and told his men: “After I visit the shrine I will toss a coin. If heads comes, we will win; if tails, we will lose. Destiny holds us in her hand.”

      Nobunaga entered the shrine and offered a silent prayer. He came forth and tossed a coin. Heads appeared. His soldiers were so eager to fight that they won their battle easily.

      “No one can change the hand of destiny,” his attendant told him after the battle.

      “Indeed not,” said Nobunaga, showing a coin which had been doubled, with heads facing either way.

      1. MyLessThanPrimeBeef

        Thanks Valissa.

        He was a true Zen guy. In Zen it’s all the same, heads or tails. They practice non-discrimination.

        It’s not this
        It’s not that
        It’s not both
        And it’s not neither

        By the Nobunaga practiced the Way of Tea, among other Ways. He studied with our first Iemoto, Sen Rikyu.

        1. Valissa

          Learning Zen is a phenomenon of gold and dung.
          Before you understand it, it’s like gold; after you understand it, it’s like dung.

          – Zen master

  2. jsmith

    If the markets themselves are being grossly manipulated by HFT, supercomputer algos and PPTs then why should the average person take stock in ANY of the numbers that are paraded before us about the state of economies but especially in the US?

    The jobs numbers?


    The housing market? (see post on shadow inventory today)

    The Fed’s balance sheet?

    Seriously, why are we even bothering trying to “determine” whether economies are technically in “recession”, “depression”, etc etc anymore when there is ample evidence as alluded to above of there being no actually basis in reality for any of the numbers – all markets included – that are reported anymore?

    The longer we persist in trying to hang onto the vestiges of a obsolete system that does nothing more than provide the elite with a framework/terminology for mass looting and theft, the longer we will be in this mess.

    1. securecare

      why should the average person take stock in ANY of the numbers that are paraded before us

      Indeed Grasshopper, reality is sometimes a shock is it not ?

      Remember that TPTB don’t like the “Why ?” to be asked so be careful.

    2. jake chase

      The numbers are largely fictional, endlessly jiggered. They are essential to evoking an air of objectivity to what amounts to a continuous propaganda stream. They provide amunition for Administration and Wall Street bullshit artists. You can listen to all of them on CNBC, all day, every day. Markets go up, the bullshit artists say ‘I told you so’; markets go down they blame uncertainty over government regulation. Sometimes, I could swear that network is a Saturday Night Live parody.

  3. Fiver

    The whole EZ problem was taken under direct control of The Management back when Papandreau sought a referendum, and is essentially resolved – the ECB will continue to expand its balance sheet and otherwise emulate the Fed. It would not surprise me one bit to see the fiscal union concept die on the vine over the next year or so as Germany has already ceded the important thing – control of the Printer. It will nonetheless be a very rough few years for much of Europe because even if all the debt was wiped clean, the basic economic facts are that large portions of Southern and Eastern Europe, like the UK and US, all lost at least a decade farting around riding a debt bubble while emerging markets increased their productive capabilities across the board.

    Where they may have a problem is in bank re-capitalization, which nobody is in a position to help with except China assuming REAL capitalization is what you’re after. For Europe’s banks to come up with the capital themselves means selling off prime assets at depressed values. I think they’ll balk if they take too much of hosing.

  4. Maju

    Gotta applaud your understanding of the situation, Edward, as shown by the sentence “the deflationary economic policy of the euro zone”. That pretty much sums it up in a most synthetic way.

    Now, if this suicidal global-purchaser attitude has finally broken the very backbone of the Eurozone (Germany) – as it could only do, who is going to generate demand tomorrow?

    That’s implicitly what you ask when you say: “Will the US also double dip? What about China’s faltering housing and stock markets –can they prevent a hard landing? And what will this mean for investors?”

    I think that the answer is yes, yes and bad news unless they are smartest than the Devil, so to say, and have even less scruples than him.

    The USA might attempt to replace or back Germany as economic locomotive but can’t really hold the effort, much less if it’s to avoid bankruptcy (by the moment) and pay for its colossal military machine.

    China can’t really take the role of global importer because it is essentially a colony of itself: maybe 6/7 of the country are exploited mercilessly in order to allow for the affluent 1/7 to prosper somewhat (the “sevenths” fraction is a mere guess but something like that). Internal colonialism. At the most (and I doubt it can) China could keep itself going somehow but it can’t act as main global market.

    Of course forget of radioactive Japan or much weaker India or Brazil or Russia either… They will try to maneuver a soft landing but they can’t lead the global economy.

    I think that, regardless of technical academic conventions as this issue of the successive quarters of decreasing (they are estimates in the best case), the macro-crisis that began in 2007 has never ended and does not look likely to end any time soon (IMO it can’t be solved within the Capitalist paradigm). This is just a small dent, a more clear signal maybe… but the problem is structural and needs creative, radical and structural solutions: Earth has already been plundered nearly all it could and Capitalism is fundamentally parasitary – or predator if you wish: without preys the predator is bound to die of hunger. The issue is: can we still save the economical fundamentals represented by the depleted ecosystem (the overall economy and ecology and humankind itself)? And if so, how? It is clear that we cannot save the predatory monster (no more enough blood for its thirst) nor we probably want it either.

    1. Nathanael

      “who is going to generate demand tomorrow? ”

      Whichever populist, who understands macroeconomics, overthrows a government successfully. Peacefully or not.

      That’s the situation we’re in. We’re waiting for regime change. Unfortunately most of the European countries don’t have elections at convenient times. Even more unfortunately all the major parties have been co-opted in the US and many of the European countries. This makes it more likely that the regime changes will be “irregular”.

      1. Maju

        That means, I understand, quantitative easing, as they call it now. But QE’s potential is exhausted in most of Earth (Europe could still play that card but not the USA nor Japan anymore). The (very brief) “Nazi miracle” was based in state indebtment and “printing money”, what eventually meant all-out war because they needed “colonies” to foot the bill and they had none (so they wanted Russia and Britain was not willing to allow that – yeah London put Hitler there to contain communism but only in Germany; it would not allow him to invade the USSR because that would have meant ceding hegemony in Europe and maybe worldwide).

        There’s no obvious solution: we need to change the very basis of economic conceptualization: from an economy of “infinite growth” (absurd and unsustainable notion) to one of stability, of near zero growth. We often acknowledge notionally that we don’t need so much junk as we have and buy (although we do need some stuff like homes, food, clothes, clean water and air, communications and also some fun), we often acknowledge also notionally that our extremist consumerism is destroying Earth and even ourselves. It’s time to address that and redesign the economy as something that does not grow.

        Naturally that requires also redesigning the economy in other key aspects such as property (collectivization) and democracy (true democracy for real people and not corporations).

    1. Fiver

      ECB, Japan, China and US are all “easing” already, and more is to come. They can keep this going for a couple years yet globally, and there’s real reason to believe the US will be the benefactor as investment preferentially piles into the US which along with Fed QE this year will bring a 2-3 year boomlet in the US – enough crappy jobs for a re-elected Obama and corporate media to claim good times are at hand.

      1. Maju

        Japan and USA cannot “ease” anymore: you can’t lower interest rates below zero (if that’s what you mean by “easing” – as in QE).

      2. Lafayette

        … the US will be the benefactor as investment preferentially piles into the US which along with Fed QE this year will bring a 2-3 year boomlet in the US

        Investment in what, if Demand is in the doldrums?

        Don’t confuse the rise in the dollar inflows (particulary out of the Euro) with “investment”. It’s just money pouring in from one currency to another – prompted not by any investment strategy but more so by a psychological need for safety.

        Such effects of money flows should not be confused, because they are very distinctly based upon different motivations.

        Only one effect is beneficial. The rise of the dollar will stymie US exports and the decline of the euro will stimulate EU exports. Which, in a way, is goodness – depending upon one’s point-of-view.

        From mine, in France, it is highly beneficial. For instance, in more tourism, which is highly needed for the economy.

  5. scraping_by

    One wonders what the loss of sovereignty is going to look like applied to Germany. Since they’re starting their broke-debt-obey slide, it’s interesting to speculate on the shape of its final, exhausted surrender.

    Merkel as chancellor-for-life? Split into pre-Bismark duchies too small the stand up against the banks? The IMF stationing Resident Agents in the capitol? Perhaps the IMF will provide the Financial Advisors the Balkan nations seemed to need.

    The financial powers that be are getting a lot more powerful, to the loss of the rest of us.

    1. Nathanael

      That’s not what will happen. The financiers overplayed their hand. They are being tossed out of government as fast as people can figure out how.

      The 99% have a lot of power, because the 1% is only 1%. When the 0.1% are too stupid to butter up the 99% or even the security forces, they go down hard and fast. Of course, smarter, populist, Keynesian 1%ers may take over.

  6. Pat

    For a different version of reality, see this article:

    “Profiting from Pain – Europe’s Crisis Is Germany’s Blessing”

    “Its neighbors may be suffering, but the euro crisis has created conditions that actually benefit the German economy. Not only is the government enjoying the windfall of negative interest rates on bonds, but unemployment is down and exports are booming…. It has become a rule of the euro crisis: While a number of euro-zone countries suffer, Germany profits. The crisis may slow economic growth in Germany, but there are also a raft of crisis-related mechanisms that help the country profit at the expense of other nations. As long as a big euro-zone crash doesn’t materialize, this cushions the effects of the downturn for Germany.”,1518,808248,00.html

    The Germans seem to be oblivious to the seriousness of the problem in the rest of the Eurozone. They think that Germany is doing fine, and that any problem in Germany can be solved by such schemes as Kurzarbeit (the plan to cut workers to 75% with government making up the rest of the wages.) And that the Eurozone is fine as long as Germany is doing adequately.

    And maybe they are right to be oblivious to the rest of the Eurozone’s problems. The last bazooka infusion of 1 trillion euros (paid for mostly by the USA through Fed bank swaps to the ECB) provides short-term funding to keep anyone from defaulting for roughly two years. And if the ECB applies fractional reserve lending to that 1 trillion, then it could last for maybe 5-8 years. (Euro bond rollovers are about 200 billion per quarter, or 800 a year.)
    The Germans obviously can’t and won’t pay the full 6 trillion required to bailout Europe all at once. But if they pay say, 300-500 billion a year, then maybe that’s a reasonable sacrifice (from their perspective) to keep the Eurozone going. Isn’t it possible that the rest of Europe would cut and deflate over the next 5 years without defaulting or blowing up? From the German perspective, does it really matter if the other countries suffer high unemployment, lowered living standards and economic decline through austerity? No, not really, since only 40% of German exports are to the Eurozone.
    The other Eurozone countries will not leave the Eurozone and/or default because to do so would cause an immediate trauma. Only a social revolution – rioting in the streets – could cause that, and that appears unlikely to happen anywhere. Does it matter to Germany or the rest of the world if Spanish unemployment is 40% and Italian pensions are cut 30%? No, not really.
    Germany will do fine regardless of what happens. Either they chug along contributing 300-500 billion a year into the Eurozone bailout, or the Eurozone breaks up and they have to recapitalize their banks, which will be no problem since everyone wants to keep their money in Germany.
    There will always be demand for German goods. Do you want crappy quality stuff from China, mediocre overpriced stuff from USA or good quality stuff that doesn’t break from Germany?

    1. Maju

      It seems to me that their luck is running out. Germany is just too small to stay afloat while the EU succumbs, after all who is (was) buying German products if not the Spaniards and Greeks? Now they can’t buy much at all but probably Chinese underpriced mediocre quality products are the best choice (because China kept the yuan at parity with the dollar and did not pretend to be holier than thou as Germany and all the other dumb Europeans – including myself, who actually bet for short term profligacy and long term misery).

      Today we are just a colony of China and we will remain that way as long as the euro is worth something and people have some to spend in Chinese goods. Chinese or Brazilian or Turkish or who knows… but cheap goods anyhow because we do not have much money anymore – and now that “we” also includes the Germans, for a change.

  7. Susan the other

    if you want to “protect your wealth” you must first define “your wealth,” and then cast it in stone by “accounting” methods that cannot be trashed by people yelling bullshit. And then just hope and pray. Otherwise You and We are all in this shit together.

    1. Maju

      Because you say so: remember that Hitler was in power not four years after 1929. I just hope that’s not what you mean by “resilience”.

      In Germany and elsewhere this structural crisis has the potential of putting everything upside down. In some cases that may be for good but in fascism is growing in Europe and very quickly so, fed not just by the crisis itself and the sense of despair that it creates but also because the elites consider fascism as an option, as they did in the 1930s.

  8. Blunt

    “if you want to “protect your wealth” you must first define “your wealth,” and then cast it in stone by “accounting” methods that cannot be trashed by people yelling bullshit. And then just hope and pray. Otherwise You and We are all in this shit together.”

    Too true, but capitalists have never cast their wealth in stone. In fact, as capitalism began the use of stone declined until now only veneer shows up in building, concrete and steel and nothing built to remain standing for hundreds of years, except for Sagrada Familia in Barcelona.

    Funny thing about money. Even the 1% think it’s the measure. Like ad-men they’ve listened too long to their own commercials.

    1. Nathanael

      “Funny thing about money. Even the 1% think it’s the measure. Like ad-men they’ve listened too long to their own commercials.”

      Ping ping ping! We have another winner! Yep.

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