German Economic Sentiment Disagrees with Europe

Market Trends - 21/04/2015

Today’s ZEW numbers from the aggregate Euro Area and Germany displayed an interesting divergence as the main driver of European growth underperformed expectations. The German economy, which has broadly benefited from its geographical distribution of customers globally and the increasing price competitiveness from a weaker Euro, has seen forecasts retreat to the downside. Export competitiveness is brilliant in a booming economy however, it the shrinking globally economy, finding export growth is increasingly difficult. The fact that the Euro Area economic sentiment grew from 62.4 in the prior period to 64.8 versus Germany’s slide from 54.8 to 53.3 shows that something is amiss especially considering diminished trade flows between member states. The vast advantages touted by instituting quantitative easing in the Euro Area has actually not solved many of the pervasive problems plaguing the economic union.

Quantitative easing has been lauded as successful for driving down borrowing costs for Euro Area members. Nevertheless, quantitative easing is only truly successful if it stimulates lending, borrowing, and investment, three things that the program has yet to actually achieve. If anything, quantitative easing has actually created problems for regional money markets with recent news that banks have been able to borrow overnight at negative rates. This means that banks are being paid to borrow money, something that is quite the opposite the classical model. By definition, Mario Draghi sees success in quantitative easing if asset values continue to inflate. Using this particular measure, a quick gander at the German DAX will corroborate his “success” but unfortunately gains for the real economy will remain elusive as shown above by the underlying fundamental data. Without a recovery in the real economy, the financial economy will also invariably suffer down the road once monetary stimulus measures are removed.


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