Break-up of EMU would cost Germany 1 million jobs

In their base scenario the economists at Allianz assume that the sovereign debt crisis will be successfully kept under control in the months ahead. Although markets will remain jittery, there will be neither a renewed banking crisis nor serious contagion of Italy or Spain. Despite repeated interjections calling for a stiffer haircut for Greece, the Troika will stick to its course and focus on the implementation of the promised reforms, the pact to involve private creditors will not be unraveled. Against the backdrop of greater stability on the markets, policymakers can further pursue their master plan of gradual deepening of the euro area.

Even if this scenario of an evolutionary development of monetary union is highly likely, other, more dramatic, developments cannot be ruled out. This would be all the more true in the event that the modest economic tailwind turns into a fierce headwind. If the crisis were to deteriorate sharply – highlighting the failure of the approach deployed to date to tackle the crisis, namely via conditional loans – this would promote the readiness on all sides for radical solutions. In this situation the only options would be the dissolution of monetary union or the introduction of Eurobonds, i.e. the immediate communitization of debt in order to restore access to the capital markets for the affected countries. While Eurobonds might stabilize the eurozone in the short term, in the longer term they could provoke conflict and vanishing acceptance of the euro. If a swift, possibly overhasty, introduction of a European liability union is not matched by corresponding control and intervention rights, along with binding fiscal rules, the rejection front is likely to grow. The ferocity of the political debate would intensify. Even with Eurobonds, the break-up of monetary union in the long term can by no means be ruled out. The extreme scenario of a failure of monetary union would have grave repercussions for Germany. "According to our calculations, a break-up of the single currency would cost Germany 3 percent of its gross domestic product and at least one million jobs," said Heise.

Upswing in Germany takes a breather

The risks to the economy have risen sharply in the shadow of the sovereign debt crisis, but recent developments are not to be viewed as the start of a recession but at most a pause in growth. In fact it is more likely that the German economy will continue to see slight growth in the second half of this year. "Several ten thousand jobs are still being created month for month in the German economy. This generates income and, with underlying inflation heading down, also boosts purchasing power. A slump in consumption is therefore not very likely," said Michael Heise, Chief Economist at Allianz. For other domestic demand sectors the outlook is also broadly favorable. Exceptionally low borrowing rates are giving a substantial boost to construction activity. With capacity utilization high, investment demand can be expected to remain strong as long as we do not see a radical blow to confidence regarding the economic future. On average, the German economy is likely to grow by 1.5 percent in 2012.

Global economy losing steam

The world economy lost momentum in the first half of 2011. With budget deficits in industrial countries starting to be reined in and monetary policy returning to normal, especially in the emerging markets, the swift pace of expansion seen in 2010 could not be maintained. The early months of this year also saw additional dampening effects. In the industrial countries the erosion of purchasing power as a result of the pronounced rise in commodity prices precluded the transition towards more private demand-driven growth. In addition, production outages in Japan following the natural catastrophe and  reactor accident in March had global repercussions, mainly via the disruption of supply chains. Industry was especially badly affected by the cloudier overall backdrop. The expansion of global industrial production ground to a halt in the second quarter. The widespread weakness spilled over into international trade which actually fell marginally on the first quarter.

German labor market still robust 

In the wake of the slowdown in the economy it cannot be ruled out that the reduction in unemployment in Germany will come to a halt in the coming months. Nonetheless, employment is likely to continue to point upwards. In the winter months 2011/2012 the jobless total will probably climb to 3.1 to 3.2 million but fall back below the 3 million mark in the spring of 2012. "As long as the economy doesn't take more of a knock than we expect, the labor market is likely to prove robust. On average in 2012 we are penciling in a jobless total of around 2.85 million after 2.98 million this year. The drop in unemployment by around 130,000 in 2012 will go hand in hand with an average increase in employment of around 250,000," said Heise.