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Europe is Burning
Germany Headed For A Downgrade?

The eurozone’s most important economy could be in for a rude awakening. In the wake of Standard & Poor’s recent downgrade of the Netherlands, warn two Dutch economists, Germany’s coveted triple-A credit rating is likely at risk. Germany is one of only two Eurozone countries left with the top rating (Finland is the other), but with its slowing output, aging population, expensive pledges to save the euro, and a new, untested governing coalition, the problems that brought down the Netherlands down may eventually afflict the economy holding Europe together:

S&P cites weakening growth prospects as the reason for its downgrade of the Netherlands. The Dutch economy contracted by 1.2% this year, and is expected to grow by a meager 0.5% next year. But the outlook is not much better for Germany. While the Bundesbank projects a 1.8% annual growth rate for next year, this figure is highly uncertain. […]

Given that its medium-term economic outlook is very similar to that of the Netherlands, Germany should take the Dutch downgrade as a warning that its triple-A rating is far from secure. In fact, with Germany’s political effectiveness, economic momentum, and fiscal position at risk, a downgrade may well be only a matter of time.

Germany’s new coalition of Christian Democrats and Social Democrats faces a big challenge ahead. The initial forecast is somewhat cloudy: to cement her coalition, Angela Merkel agreed to lower the retirement age for some German workers and contribute more money to public pensions. A national minimum wage is also set to be introduced. Let’s hope Germany’s governing class isn’t beginning a long-term trend of sacrificing economic strength to score political points. Productivity, growth and job creation are guaranteed to no one.

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