Germany almost completely has escaped Europe’s problems, at least in so far as the strength of its sovereign debt is concerned. S&P confirmed its “stable” outlook on the country’s AAA rating for its long-term debt. But the assessment was based more on Germany’s ability to control its debt than on the future of Europe. This indicates that Germany has not, nor can it, isolate itself for the region’s troubles as S&P sees it.
As part of its assessment of Germany, S&P experts wrote:
In 2009, Germany introduced a constitutional amendment that aims to limit structural federal government net lending to 0.35% of GDP per year by 2016 and requires German states to have balanced budgets over the economic cycle. We note that similar statutory fiscal constraints have had a poor track record in several other countries. However, in our view, this framework may be more effective in Germany because of long-standing public and political support for fiscal discipline.
Germany, the champion of austerity among troubled nations in the region, at least holds the high ground, having adopted austerity itself. This fact gives Germany some moral standing as its presses nations like Spain and Greece to tighten their belts.
The other part of S&P’s assessment that offers encouragement is its belief that Germany’s inner strength as an economy will keep its gross domestic product modestly clear of a recession. The S&P’s forecast growth rate may be for mediocre improvement, but at least it acknowledges that Germany can keep away of the worst effect of the catastrophe of the region’s finances.
The S&P authors write:
[W]e forecast that real GDP growth will slow to approximately 1% in 2012 and 2013 from an average of more than 3% in 2010 and 2011. We anticipate only slight increases in GDP in subsequent years.
This assessment may be relatively good for Germany, but not for its neighbors. The reluctance of Germany to make a considerable commitment to more bailout funds or an approval of European Central Bank bond-buying actions will be undermined by the realization of the Merkel government that the next two to three years will be somewhat difficult. It will be difficult enough that Germany will abandon whatever small taste it had for a larger role in aid packages for the balance of the region.
Douglas A. McIntyre