While futures are still drunk on the euphoria from Europe's bailout, and the EURUSD has rebased modestly higher by 200 pips to 1.44, the actual "cash flow" issues that are at the base of every modern problem are once again resurfacing, this time at key EFSF guarantor Germany, whose July Ifo business climate index, based on a monthly survey of some 7,000 firms, plunged to 112.9 from 114.5, well below expectations of 113.8, a nine month low in this closely watched indicator. "Germany has been the star performer in the industrialised world since the end of the financial crisis, and economists were split on whether Friday's data points to a sharp slowdown or just a moderate easing from unsustainably strong growth in the first part of 2011." Coming on the heels of yesterday's sharp decline in European PMIs confirms that while Europe has perfected the art of wealth redirection, primarily in the direction of bank balance sheets, it may need to soon grapple with the far more difficult task of stimulating the best performing industrial economy since the GFC. Because all it would take for the latest European "bailout" to fold would be for a rating agency to say that they are now shifting their attention to the creditworthiness of Europe backstopper supreme: Germany.
Germany has been the star performer in the industrialised world since the end of the financial crisis, and economists were split on whether Friday's data points to a sharp slowdown or just a moderate easing from unsustainably strong growth in the first part of 2011.
The euro zone's manufacturing Purchasing Managers' Index showed growth in the sector came to a standstill this month, while the equivalent services index sank to a 22-month low.
"The Ifo index too is increasingly pointing to slower economic growth in Germany -- without meaning that the recovery is immediately going to keel over," said Commerzbank economist Ralph Solveen.
Germany's economy grew by 1.5 percent in the first three months of the year, but economists polled by Reuters expect this to slow to a quarterly average of 0.5 percent for the rest of the year, still a strong rate of expansion by German standards.
Ifo economist Klaus Abberger was also relatively upbeat, saying that Germany's economy was set for a soft landing. The euro zone crisis had relatively little impact on Germany to date, although export expectations were down sharply, he added.
Other economists were concerned that Friday's Ifo data could presage a sharper slowdown. The expectations component of the data was down, and construction was the only sector to report an improvement in business conditions.
"We suspect that July's fall is the start of a sharp downward trend," said Jennifer McKeown of Capital Economics. "The strong euro was taking a toll on exporters. And with German taxpayers becoming ensnared in the euro zone peripheral debt crisis, it seems unlikely that consumers will be prepared to pick up the slack."
Combined with recession in the periphery of the euro zone, Germany's weakening growth meant the bloc as a whole would barely expand next year, McKeown added.
The paradox is that while the Greek bailout should have been accompanied with further EUR weakness, it has resulted in a surge in the common currency which in a perverted way is an unwanted outcome for Germany's manufacturing base which now it can be safely said is carrying the burden of the Euro experiment entirely on its own shoulders. However, Germany's loss is China's gain, which can continue exporting a record amount of trinkets to the EU. So when Germany does fold in a few short years, one can only hope that China will return the favor and expand the EFSF to the ~€5 trillion that will be needed to prevent a German insolvency, sapped after years of carrying, and funding, the PIIGS.