No plan, too scared

Hans-Peter Keitel, president of the Federation of German Industries (BDI), said Thursday that it would be a bitter blow if government incompetence damaged what he described as excellent prospects for German companies worldwide.

"Politics planted the roots of the current uncertainty in the financial markets, not speculators or ratings agencies," Keitel told the news agency dpa. "Now it's up to the politicians to restore the trust."

The opinion has found some resonance among economists. Joachim Scheide of the Kiel Institute for the World Economy (IFW) told Deutsche Welle, "The stock markets are seeing that the governments haven't got a handle on the debt problem at all."

Ferdinand Fichtner of the German Institute for Economic Research (DIW) also agrees with Keitel's main point. "He's talking about the roots, and of course the roots of the current situation are political," he said.

Markets too sensitive, governments too uncertain

Economists believe this is especially true of the European debt crisis, where governments have been tentatively making piecemeal budget cuts and regularly discussing putting extra money in bailout funds. This leaves the governments constantly one step behind the skittish markets. "The politicians simply haven't been able to agree on a sustainable, long-term solution," said Fichtner.

"There's no clear line," said Scheide. "The European governments are just pushing the problems into the future."

But Fichtner adds a caveat - the stock market's reaction hasn't exactly helped. "It is somewhat exaggerated," he said. "The reaction is not justified, considering the latest developments in the governments."

"Two things have come together," concludes Fichtner. "Firstly, the markets have been a bit over-optimistic in the last year or two. The upswing in the markets was a bit too hasty, so what we're seeing at the moment is a bit of a correction. On the other hand, the governments have caused massive uncertainty."

Ratings agencies are just messengers

World leaders, including German Chancellor Angela Merkel, have occasionally turned on the ratings agencies for downgrading countries' ratings and blamed this for destabilizing the markets. But Scheide says this is a misleading target.

"You don't need the ratings agencies to see that a lot of countries have a debt problem," he said. "It doesn't really matter whether the US is downgraded or not - everyone knows they have a debt problem."

And Scheide adds that continued indecision among world leaders is likely to worsen the situation: "If things carry on like this, then Germany will have a debt crisis sooner or later."

In one sense there is not much new about Keitel's statement - economists have been warning of the consequences of mounting state debt for years. The problem, according to many analysts, is how governments are dealing with the crisis now that it has arrived.

Scheide concedes it is very difficult for the governments to find a way out of this mess, now that we're in it. "It's not going to get easier," he said. "They waited too long and let the debts mount up."

Patience is a virtue

Keitel stresses there was no real economic reason for the current panic among investors. He admits the risks had certainly increased significantly, "but German companies and the German economy have the best chances to be among the global winners."

Again, Scheide of the IFW shares Keitel's analysis. "Of course, if the stock markets see a recession coming then German industry could easily be affected again," he said.

Keitel points out that the German economy rode out the financial crisis of 2008 extremely well, and that industry worked hard for this success. He put this down, in part, to astute business sense, praising the innovation of Germany companies and their sensitivity to customer demands.

He also says companies showed patience, and they are reaping the rewards. "It's this patience that's missing in politics," he said. "The politicians are always in crisis mode, and are getting used to a strategy for solving problems that they can't sustain."

There's no doubt that exploding state debt is sucking confidence out of the markets, a situation exacerbated by the threat of increased inflation. The growth being reported by several German industries is fragile - if the debt crisis continues, and governments impose higher interest rates, there is real danger of a recession.

For Keitel, it all boils down to a simple criticism: the German government did not save enough money. "After a historical growth rate of more than 3 percent for the second year in a row, they are still allowing the state to get into even more debt. That will only harm growth," he predicted.

Author: Ben Knight
Editor: Martin Kuebler