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What Does Germany’s Economic Growth Mean for Europe and America?

August 13, 2010

The latest economic statistics from Europe show that some economies of Europe are moving in the opposite direction.   It was announced today that the German economy grew at 2.2% between April and June (which is equivalent to a whopping annualized rate of 9%).  However, yesterday we learned that the Greek economy actually shrank at by 1.5% over the same period.  Similarly, German unemployment is now at 7.6%, which is close to its rate before the financial crisis, while Greek unemployment continues to rise and is now close to 12%.

Germany’s economic growth appears to be the result of strong exports and short term growth in the construction sector as a result of the harsh winter.  Germany is the second largest exporter in the world after China, and exports have traditionally been the backbone of German economic growth.  Thus, Germany is ironically benefitting from Greece’s fiscal problems, since the Greek bailout in May caused the euro’s value to decline against the dollar.  This in turn made German products cheaper compared to goods priced in dollars, making German products more competitive and increased demands for these goods.   As a result, German exports to industrializing countries, such as China, grew in the second quarter.  These are markets where German and American firms actively compete against each other, but The Economist argues that this could be good for the American economy, since the two economies are interconnected.

Germany’s economic growth probably spur expansion in other eurozone members, such as Austria and the Netherlands, whose economies are closely tied to Germany.  In addition, Germans may now feel that economic conditions allow them to travel to other countries such as Spain and Greece, injecting euros into those economies.  Of course, other eurozone members feel that German’s boom comes at their cost, since Germany traditionally has a large trade surplus and German exports could be crowding out products from other member states.  For instance, Spain and Portugal’s economies grew at the very slow rate of 0.2%.  As a result, the eurozone may continue to experience a wide scale of economic recoveries (or lack of recovery).

This will certainly not ease concerns that the eurozone is not the optimal currency union nor calm fears that the euro may not survive the crisis, if economic growth continues to vary widely across the Eurozone.

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