Germany's economy is slowing dramatically, an unwelcome turn of events that will put even more strain on existing fractures in the European Union (EU) as it struggles to cope with its ongoing sovereign debt crisis.
Last month a consortium of eight leading economic institutes slashed their forecast for German economic growth in 2012 by more than half, from 2% to 0.8%.
That decision was validated yesterday (Monday) when Germany reported a 2.7% drop in industrial production for September. That's the biggest drop since February 2009, and triple the decline that analysts had expected.
Worse, such a decline will make it even tougher for Germany, which has supplied the bulk of the bailout money that's prevented the Greek debt crisis
from triggering a global financial meltdown, to play the role of hero in the European debt crisis.
"This is very, very serious on a lot of levels," said Money Morning
Chief Investment Strategist Keith Fitz-Gerald. "If Germany drops into recession the pressure on German banks will be extreme."
Fitz-Gerald said that the banks, as well as the German people, most likely would want to "bring their money home" to address Germany's own economic needs.
Of course, the loss of its greatest benefactor will have dire consequences for the Eurozone.
Fitz-Gerald thinks the situation could even reach a point where Germany would opt out of the common euro currency to save itself.
"Everyone's been talking about Greece leaving the euro," Fitz-Gerald said. "But Germany leaving is a real possibility, depending on how bad it gets. It's no longer inconceivable."
Catching the Contagion
Germany's economy is faltering mainly because of the problems plaguing its Eurozone partners. A report last week showed that orders for German industrial goods from other Eurozone members fell 12.1% in September following a 1.4% drop in August.
"German industry has finally caught the crisis virus," Carsten Brzeski, an economist in Brussels for ING Groep NV (NYSE ADR: ING
), wrote in a research note. "The financial turmoil and the economic slowdown in other Eurozone countries have obviously spoiled the appetite for goods made in Germany."
Many economists now are worried that the entire Eurozone is heading into a recession, which will make it harder for countries like Germany and France to help struggling Portugal, Ireland, Italy, Greece and Spain (PIIGS).
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