German Export data is one of the barometers of European economic health we follow closely; as of Q3 of last year exports totaled nearly 45% of GDP for Europe’s largest economy. Data released this morning showed total exports dropped a seasonally adjusted 3.7% month-over-month in December, rebounding somewhat from the -10.8% level registered in November, potentially signaling a higher low for industry in Europe’s largest economy. Exports increased 2.8% for the total year with shipments to countries outside the EU showing + 6% vs. +1.1% for intra-EU sales.

Imports slid by 4.1% M/M during the same period, with the total trade surplus tapering to €6.9 Billion from €9.9 Billion in November.

The clear trend emerging from German export data for late 2008 is a sharp decline in demand for manufactured products, particularly cars and engineered metals products, and a particularly strong drop off in intra-EU sales:


One signal that global confidence in the German economy is waning is being provided by the yield curve, which has widened to a spread of over 200 basis point between the 2 and 10 year bunds as capital continues to flow into short term German debt to the determent of long term paper, which faces pressure with a large auction later in the week –in the wake of last month’s cooling demand.

German leaders, after initial slowness, now appear to be proactively responding to the situation. Over the weekend two important policy changes were announced:

Following a Security Council conference in Munich over the weekend German Chancellor Angela Merkel issued a joint statement with French President Nicolas Sarkozy saying that they are working on ideas for a common European Union response to the economic and financial crisis. Merkel invited European leaders to meet in Berlin on Feb. 22 to discuss changes in the global financial system before an April 2 summit of Group of 20 government heads in London.

Also over the weekend Germans received the news that German Economy Minister Michael Glos has tendered his resignation, just seven months before national elections. By all accounts, Glos has taken a back seat in recent weeks to the increasingly popular Finance Minister Peer Steinbrück (a member of the SPD party) in handling Germany’s response to the financial and economic crisis. Glos, 65, garnered criticism for struggling to show a command of economics like his predecessor, Wolfgang Clement. He has made embarrassing references to Deutschmarks instead of Euros in speeches and was absent for a long trip to Asia during critical early stages of the crisis.

This morning Karl-Theodor von und zu Guttenberg of the Christian Social Union (CSU)—the Bavarian sister party of Merkel’s Christian Democratic Union (CDU)—was named in Glos’s place. Merkel, who leads a Grand coalition with the Social Democratic Party (SPD), is fighting for her party’s reelection in September. Glos’s poor performance and resignation in this environment cast a poor light in confidence for Merkel’s party in the wake of the CSU losing its decades-long absolute majority in Bavaria.

The hope for a CDU led coalition election victory now seems to lie in Merkel’s ability to resuscitate German leadership in EU economic policy making and to steer the ship forward again. The German economy contracted by 2% in the final three months of 2008 alone and consensus forecasts predict another 1-1.3% decline in 2009. Any further signs of indecisiveness could be politically and economically fatal for her party.

We continue to believe that the German economy is the strongest in Europe on a relative basis, but that strength will mean little if there is no confidence it its leaders. We will keep our eye firmly on the situation there.

Matthew Hedrick

Andrew Barber

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