No country’s economy is truly independent. International factors are always at play, and trade ensures that states are often reliant on one another. This is particularly true for members of the Eurozone. With one currency uniting most member states, and the European Central Bank, Europe’s economies work as parts of a whole. If one part is sick, then so is every other part. Which is why an economic slowdown in Germany can hurt Italy – badly.
Germany has the biggest economy in Europe and accounts for the creation of a large proportion of European wealth. Germany has long been dragging the Eurozone ahead, even as the Italian, Spanish and Greek economies have struggled.
Without Germany’s help, the Eurozone would probably not have survived its recent debt crisis. And when European consumers are out of pocket, German shoppers fill the void.
A German economic meltdown could be disastrous for the rest of Europe. It would pull many other economies down with it.
Unfortunately, 2016 has not been a strong year for the leading economy.
Germany’s economic slowdown
Germany’s economic woes are closely linked to China’s slowdown. Germany relies on trade of important goods and technology. Machinery, cars, and high-tech energy equipment have been bringing in billions, filling the needs of emerging countries.
But the emerging markets have struggled lately. Middle Eastern countries usually kept afloat by oil money are no longer riding the waves. Russia, facing Western sanctions, is unable to buy expensive equipment.
Germany’s industrial production at the start of the year was at 0%, with customer confidence plummeting. France, one of Germany’s closest trading partners, is struggling economically. The German economy is being weighed down from all sides.
Italy’s debt crisis
Italy has still been unable to rebound from the sovereign debt crisis. This is in large part due to challenging economic conditions and a lack of fiscal stimulus measures, but there are also signs that aspects of the debt crisis remain intact, including nonperforming loans and high unemployment.
Stimulus from the European Central Bank increased optimism, but failed to have the impact hoped for. It is a particularly vulnerable time for Italy’s economy. Headline consumer inflation is currently printing at -0.30%, with falling prices a strong indication of weak demand. Unemployment is at 11.5%, which detracts heavily from GDP growth, as well as consumption.
The German effect
In this context, Germany’s economic slowdown is particularly harmful for Italy. The vulnerable Italian economy is relying on its usual helping hand to pull it forward until it can get back on its own feet. But Germany needs its own help.
Germany’s troubles have a chain reaction. The rest of the Eurozone panics in response with consumer confidence plummeting, leading to more problems for Germany. Already struggling economies confront further unfulfilled expectations, creating a heavier burden for Germany to carry.
It remains to be seen how Germany will recover from this slowdown. Italy’s economy will have to carry itself in the meantime, a feat that will not be straightforward.