German Business Loses Trust in EU

German Business Loses Trust in EU

The leading European economy is hitting snags on the way. The Germany’s confidence indicator has pointed sharply down this month. (1) The country’s economy is losing steam due to the sanctions imposed by the West on Russia, something that aggravates the economic slowdown throughout the European Union. 

The Ifo Business Climate Index is a closely followed leading indicator for economic activity in Germany which is a critical gauge of overall economic performance. It is indispensable for making forecasts, concluding agreements and even taking political decisions. The slowdown in August has already negatively affected Berlin and Brussels. It fell too sharply. Even the most pessimistic forecasts had failed to predict such an abrupt plunge. The Ifo economic institute's closely watched business climate index fell to 106.3 points in August from 108.0 in July. Analysts polled by Dow Jones Newswires had expected a shallower dip, to 107.0 points. The index went down at much faster pace to hit its lowest level since July 2013. (2) The businessmen and bankers of Germany, the old continent’s economic leader, lose confidence in the European Union. The phenomenon poses a serious threat to the whole Europe. 

«The continued fall of the Ifo is really problematic for the rest of the euro area, which is barely growing», Commerzbank’s chief economist, Joerg Kraemer, wrote in a research note. «The ECB’s optimistic economic outlook is crumbling». (3)

The index went down along with the contraction of German GDP. The euro zone's largest economy shrank 0.2% in the three months to June, the country’s federal statistics office said. German analysts are unanimous saying that the lower confidence index and the economic slowdown are directly related to the «sanctions war» raging in Europe. The sanctions imposed by Brussels have backfired to hit Italy, France and Germany. None of the euro zone's three largest economies have expanded in the three months to June, making it unlikely that the euro zone as a whole managed to generate any growth. Italy is in the state of «technical recession», figures from France's statistics agency showed the euro zone's second-largest economy failed to record any growth for the second quarter in a row in the period April through June. It’s hardly a coincidence that the euro zone has shown no economic growth in the second half of 2014 after the meager recovery over the past year. 

According to Spanish El Pais, «The problems continue to exacerbate. France and Germany, the two European leaders, somehow manage to keep afloat while Italy, the European third economy, is facing slump. It negatively affects others as European economies are closely intertwined. With exports dropping Europe is threatened by the third wave of economic slump since the 2008 crisis. It calls for resolute actions. As the tensions between the European Union and Russia are running high, the US economy may soon lose impetus for growth while the policies of developing nations are unpredictable. These factors greatly complicate the economic recovery». (4) 

According to Rabobank analyst Michael Every, «Monetary policy stimulus is still here for a while yet in the US, and a very long while in Europe», said Rabobank analyst Michael Every». (5) 

The situation gives rise to growing discontent of European businessmen with the «sanctions war» against Russia as it stimulates the emergence of more grievances to face. According to Marcel Fratzscher of Austrian Wirtschaftsblat, Europe’s banks have extended almost €200 billion ($268 billion) in loans to Russian institutions and firms, and hold a significant share of Russia’s euro-denominated assets, making them especially vulnerable. Moreover, the euro zone’s current stress tests may well reveal significant capital holes in major European banks in the coming months. Having just emerged from a deep recession, financial disruptions could easily cause Europe to slide back into recession, particularly given the euro zone economy’s close links to Russia via trade and energy. (6)

 Europe has done much worse that the United States. An index of U.S. leading indicators rose in July by the most in four months, as stronger job growth helps power the world’s largest economy. The Conference Board’s index of U.S. leading indicators, a gauge of the outlook for the next three to six months, climbed 0.9 percent after a 0.6 percent gain in June, the New York-based group said today. The median forecast of 49 economists surveyed by Bloomberg called for a 0.6 percent advance. More jobs are underpinning sentiment and demand among U.S. households. Going forward, further gains in wages and improvement in the housing market will be needed to boost consumer spending and add additional momentum to the economic recovery, now in its sixth year of expansion. (7)

All these juxtapositions lead to only one conclusion – it is exactly the European economy that is hardest hit by the anti-Russian sanctions imposed by Washington. At the same time the United States uses the situation to enhance the competitiveness of its economy and boost global clout bolstered by military force. Finish Taloussanomat (8) identifies three reasons to explain why the United States so obsessed with Ukraine. According to him, economic and military leadership of the United States in the world is hard to deny. Therefore, the main goal of those in power in the United States - to maintain its superpower status at any cost. Two reasons are based on geopolitics: first of all, is the export of instability in the region of Ukraine, which allows you to create tension in the Russian borders and link the Russian army and the economy. Second: Ukraine can be considered as an advanced base for the deployment of forces to ensure the safety of the dominant superpower. The third reason is the growth of competitiveness of the United States against the backdrop of crumbling as a result of economic sanctions EU and Russian economies. 

The growing problems that negatively affect the European Union, the euro zone and Germany make Washington happy. The Europe’s loss is the US gain. 

[4] Translated from Spanish: