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Germany remains key pivot for Euro Area’s resurgence

1JH26062020

The Euro Area’s largest economy experienced headwinds in similar fashion to other countries, albeit, the country did not experience the sheer scale of the problem as other European counterparts. The grand coalition forming the country’s government has been swift in countering the negative impact from covid-19 with the help of the fiscal headroom for the economy. The repercussions set forth for the labour market is likely to be material as it plays into the federal election in September 2021. The challenging global environment may mean that Germany shifts its focus on towards the Euro Area and have a more activist approach by the Government in order to ramp up demand. The subdued economic environment may mean that Germany reinvigorates its push for technological innovation. Following the accounting scandal by Germany’s darling fintech company, Wirecard AG, the country will want to reinstate its dignity in the tech space and give key regions a run for their money.

Germany’s next year elections will be key in order to obtain backing for crucial policies that should seek to transform the economy into reducing key sector exposures and balance out its economy. Germany will seek to capitalise on its EU Presidency in the second half of this year with critical issues hinging on China, the US, Brexit and progress on the banking union. The fiscal response to Covid-19 slowdown has been impressive by Germany with a stimulus programme of Eur 750 billion launched in March and an additional Eur 130 billion during June. The balanced budget for Germany ever since 2014 meant that the country could splurge on its commitment to resurge its ailing economy.

Voter support for further fiscal boost may provide further incentive for the government to strengthen the recovery fund. Expectations point towards reasonable debt ratios for the country once normality resumes. Expectations for normality centre upon the provisioning of a vaccine, which is still a big unknown at this stage. The Chancellor decision ahead for the German Grand Coalition parties (CDU/CSU and Social Democrats) will be mightily important for it to secure a degree of stability.

The enacted stimulus in reducing the VAT shows that this was the costliest measure to date, which is focused on getting consumers back into the shops as it supports the labour market. The limited support to the auto industry shows that Germany lacks conviction to this traditional export strength. As such, the country is seeking to understand where to anchor its resources in order to seek a roadmap, which balances its key economic sectors, and reduce the dependency on manufacturing. Germany must focus its policies on key growth pillars that are linked to secular trends that are shaping tomorrow’s economy. Germany’s path to growth will have a profound impact on the Euro Area’s ability to stack up against global peers as other European countries will be influenced by these same decisions.

This article was issued by Jesmar Halliday, CFA. Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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