Correction but no collapse. The German ZEW index dropped in April after four consecutive increases. The ZEW index which measures investors’ confidence now stands at 36.3, from 48.5 in March; still above its historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 9.2, from 13.6 in March. New uncertainty stemming from the euro crisis and doubts about the strength of Chinese economy seem to have dented analysts’ optimism. However, it only looks like a correction at a level still consistent with modest growth. The big confidence collapse some had expected after the Cypriot bailout has so far failed to appear.
In the coming months, economic developments in Germany could take a back seat, making room for politics. As springtime has finally started, the economy should leave any weather-inflicted problems behind, finally starting the recovery. However, the economy will not experience the same sharp rebound as after the last contraction in 2009, but should rather recover gradually on the back of solid domestic demand and continued but fragile improvement of the global economy. Unless tail risks materialise, the recovery should neither be weak enough to unsettle, nor strong enough to create new excitement. It could become the economic incarnation of muddling through.
As regards politics, the campaign for the federal elections in September is gaining momentum. Even if there does not seem to be the single, decisive election topic, it is obvious that the euro crisis will be part of the campaigns and discussions. It might not be a winning issue between chancellor Merkel and her social-democratic challenger Steinbrück as the two biggest German parties hardly have substantially differing views on the crisis management. However, the emergence of a new, anti-euro party, the Alternative for Germany, could cost both parties important votes, even if Germans normally think more than twice before they choose political experiments in federal elections. Interestingly, according to latest opinion polls, there are more potential voters of the current opposition parties sympathising with the Alternative for Germany than voters of Merkel’s coalition.
With anti-euro and a return to the D-Mark ideas finally having a voice in Germany’s political arena, chancellor Merkel and her government are most likely to continue their strict stance of conditional integration, rather than easing it. In our view, Merkel will avoid making any concessions in the coming months. To the contrary, Merkel is likely to guard German taxpayers’ money even more than before. In this respect, expect the German government to continue pushing for the concept of bail-ins, even if it is not a template, to become a permanent feature of the crisis management’s toolkit.