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'Germany not feeling euro zone pain'

Monday 21st May 2012

Rupert Watson, Head of Asset Allocation, Skandia Investment Group, looks at how the German economy is moving forward despite wider problems with the euro zone...

"Germany was reported to have grown at 0.5% in 2012 Q1, much stronger than expected. Germany continues to outperform the rest of the euro zone and most of the developed world. Indeed, with unemployment at the lowest in over 20 years and business and consumer confidence still very high, it is easy to see why Germany is still not feeling the rest of the region's pain.

"The German economy continues to grow strongly, boosted by the strength of its exports to emerging economies such as China and steadily rising consumption.

"From Germany's perspective it is reaping the rewards of a decade of prudence, while the peripherals are paying for a decade of excess. Germany argues (and with some justification) that it is not its fault that others have wasted the last 10 years and that to close the gap requires the Spanish and Italians to become more German and not the other way round.

"However, while less government spending, improved labour market flexibility and better governance are desirable in their own right, attempting to resolve 10 or more years of mismanagement in a short space of time was always going to be a push. The clash between this and the political realities have been growing for some time.

"The ongoing strength of the German economy will eventually help to rebalance the euro zone economy as a whole to everyone's benefit. However, this is likely to take years rather than months.

"It is becoming increasingly clear that neither financial markets nor the politics on the ground are working to the same timescale. Germany needs to give the peripheral economies more time to resolve their problems or risk financial and political chaos on its doorstep."

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