Germany witnessed the dip in GAP for the second quarter reaching -0. %. At the same time European Union saw O % growth in this quarter which highlights that something is seriously wrong. If it will become a recession then this will be the third recession after 2008 which has been names as Triple Dip Recession. The investments have severely declined in Germany in recent years. It received 4th lowest investment among all European nations in 2013.
German Economy which relies heavily on exports of motor vehicles, machinery and Chemicals has also seen a decline in demand. This forced the government to downgrade the growth forecast room 2% GAP growth to 1. 2 % growth. The main reasons for this decline in exports are the strong Euro currency and low inflation. Moreover the Ukraine Crisis and chaotic Middle East is also contributing to the cause. China’s slowdown and the impact of Russian sanctions have also hurt the German economy as China alone imports German goods worth 67 billion Euro every year.
Role of Euro in Crisis According to the analysis by many analysts, the European Debt Crisis’s main cause was the wild fiscal extravagant spending by non-core countries on expansion in lifer state model and rising public sector wages. The main reason for this spending was low interest rates and strong Euro. So Euro was directly and indirectly involved in triggering the crisis. Fully integrated European market was the result of Euro, even inspire of on-going financial integration process since 1957 and adoption of Financial Services Action plan (FSP) in 1999.
This financial integration combined with the minimized risk of lending in non-core countries resulted in a drastic rise in UAPITA flows across border with claims by core countries on non-core countries on a steady rise, especially the money lend by German and French banks to non-core countries. The elimination of currency risk along with the easier access to capital markets internationally led to confluence of interest rates in periphery countries Upton core countries level.
It resulted into decrease in lending rates on commercial bank loans which alongside the cost of sovereign debt in periphery countries could be labeled s the most severe impact of adoption of Euro which further led to gross implications for the financial system in Europe and European economies’ structure. Factors such as free flow of financial, low borrowing rates, increase in liquidity because of rise in lending from core countries to non-core countries and no exchange rate risk created a fallacious sense of prosperity in a low risk environment.
The sense of prosperity was erroneous because it was not matched by production improvements or business environment, which would have been a strong foundation or long term sustainable growth. Actually, this adoption of Euro compounded weak competitiveness which had already had a profound impact on these countries before adoption of common currency. Also, this loss in competitiveness can also be attributed to steep rise in wages in non-core countries. Between 2001 and 2011, labor costs in Greece rose by 33%, in Italy by 31%, in Spain by 27%; whereas it grow only by in USA and only by 9% in Germany.
Moreover, the common currency was the focal point of this outcome because of its impact on interest rates, financial integration and promotion of a culture of exports in core countries and a culture of imports in non-core countries. Germany has been heavily shedding out money to bail out debt trapped nations like Greece, Spain etc which created pressure on it too. But this was also essential to maintain the sanctity and exchange rate of Euro as a currency. Moreover Euro also led to economic pressures due to the system of financial control for the nations under European Union.
A common currency which was adopted by European nations to tie them has rather resulted in economic extractions on the nations. The central bank of a country can effectively manage money supply in economic turmoil but the concept of common central bank which gave birth to European Central Bank has failed here. Although European Central Bank tried to do damage control by resorting to negative rates of Interest, from O to 0. 1%, which was paid to banks so that they can protect their funds to promote growth. But still, it failed to impact the Euro zone economies significantly.