Neoliberalism finally catches up to the German economy

Neoliberalism's fatal flaw is that because it is an economics of the idle rich, the rest of the society is left behind in poverty.  Poor people don't buy much so neoliberalism's most predictable policy outcome is demand destruction.

For many years now, German economic thought has been dominated by the most reactionary neoliberals possible. Wolfgang Schäuble, her current finance minister, believes that neoliberalism is not only functionally and intellectually superior, but morally and ethically as well.  And for a long time, German economic performance has given him little reason to doubt his convictions.  But as the rest of the EU collapses into economic chaos, poverty, and hopelessness, Germany is discovering that her prosperity is not possible without prosperous customers—poor poor people eventually lead to poorer rich people.  Of course, if the rich can get governments and central bankers to cover up this reality, they may never know that the real economy is collapsing all around them.

But the laws of economic gravity cannot be suspended forever and demand destruction was likely to have caught up with the Germans sooner or later.  But then, she foolishly joined the rest of the EU in imposing sanctions on Russia—one of the few remaining countries with the ability to buy her exports.  Not surprisingly, the real German economy hit a wall in August.  Factory orders plunged 5.7% in ONE month.

Neoliberalism is a reliable way for rich nations to become poor ones.  Because Germany is so very rich and still has a functioning real economy, it is unlikely she will become Greece or Italy anytime soon.  Even so, she will recover from this economic hurricane only with great difficulty and she will be significantly poorer a year from now.  Unfortunately, a year from now, the overwhelming majority of German economists will be devout neoliberals who will be shouting that the problems were caused by people lacking sufficient devotion to the true faith.

German Factory Orders Slump Most Since 2009: Economy

By Alessandro Speciale Oct 6, 2014

German factory orders (GRIORTMM) plunged the most since 2009, underlining the risk of a slowdown in Europe’s largest economy.

Orders, adjusted for seasonal swings and inflation, fell 5.7 percent in August, the Economy Ministry in Berlin said today. Economists predicted a 2.5 percent decline, according to the median estimate in a Bloomberg News survey. The data are volatile, and the drop followed a 4.9 percent increase in July that was the most in more than a year. Orders fell 1.3 percent from a year earlier.

Deteriorating confidence is undermining a rebound in Germany’s economy from a second-quarter slump. The 18-nation euro region is struggling to sustain its recovery amid rising political tension with Russia over its support of separatists in Ukraine and inflation that’s running at a fraction of the European Central Bank’s definition of price stability.

“Geopolitical risks, especially the crisis in Eastern Ukraine, have made companies cautious about their investment plans, despite very favorable fundamental and funding conditions,” said Christian Schulz, senior economist at Berenberg Bank in London. “Once these uncertainties fade confidence and thus investment should rebound.”

The euro was up 0.4 percent today and traded at $1.2563 at 1:53 p.m. Frankfurt time. The yield on German 10-year bonds was down 2 basis points at 0.91 percent.

Export Orders

Export orders dropped 8.4 percent in August, while domestic demand slid 2 percent, the ministry said. Investment-goods orders plunged 8.5 percent and basic goods orders slid 3 percent, while consumer goods rose 3.7 percent.

While August orders were weak partly because of school holidays, they were also affected by the slowing euro-area economy and geopolitical risks, the ministry said.

Euro-area inflation was 0.3 percent last month, compared with the ECB’s goal of just under 2 percent. A slowing Chinese economy and spiraling international sanctions against Russia have weakened business and investor sentiment.

The World Bank lowered its forecasts for growth in developing East Asia this year. The region is projected to grow 6.9 percent in 2014 and 2015, down from 7.1 percent seen in April. That compares with global growth of 2.6 percent in 2014.

The euro area is still on track for a “modest economic expansion in the second half,” even though risks remain on the downside, ECB President Mario Draghi said last week. The Governing Council kept interest rates unchanged at record lows and said it will start buying covered bonds and asset-backed securities to support the economy.

“The outlook for the German economy is subdued,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “I’m not sure we’ll see growth in the third quarter.” more

Germany was going to be in economic trouble because of the poverty in the rest of Europe.  But those economic sanctions on Russia really were a crazy act of self-destruction.  If those are lifted soon, that damage will be mild and temporary.  But the longer they hang on, the more Russia's import substitution strategy will have time to work.  The Germans should have paid attention when Victoria Nuland said "F*ck the EU."

Germany aware EU sanctions against Russia affect Berlin - coordinator

World October 06, 2014

Lifting sanctions will primarily depend on the political decisions taken in Moscow, the diplomat stressed

Germany understands that sanctions against Russia, introduced by the 28-member bloc after long discussions, are causing harm to Berlin, the coordinator for ties with Russia told Kommersant on Monday.

“We do not want them: we know that we are bringing harm to ourselves, and I have listened to enough businessmen who are telling me this every day. The sooner we are out of sanctions, the better,” said Gernot Erler , Coordinator for Intersocietal Cooperation with Russia, Central Asia and the Eastern Partnership.

Erler said however, the representatives of German industries have acknowledged the politics should prevail over economic interests. “This issue is so serious that economic interests should be put on the back burner,” he said

Lifting sanctions will primarily depend on the political decisions taken in Moscow, the diplomat stressed.

“If Russia is in fact step by step actively seeking to comply with the agreements it signed, there will be no new sanctions,” he said, adding that “there are all the grounds to change the situation.”

“Now real steps should be taken. In this case, I am sure the sanctions can be suspended and lifted,” Erler told the newspaper.

Last week, Russian President Vladimir Putin said he hopes that Russia and Germany will continue further bilateral cooperation aimed at ensuring stability and security in Europe.

Putin said he expects that Moscow and Berlin will be able to boost ties with the goal of “maintaining stability and security on the European continent and in the whole world.”

Last year, Germany, Russia’s most important trade partner in Europe, exported about 36 billion euros of goods to Russia. In the first half of this year, Germany’s exports to Russia plunged over 15%, before Russia’s agricultural ban imposed in early August amid Western sanctions. more