PIIGS languish as Germans work hard

Posted on: January 20, 2011 in: Uncategorized with 0 comments

The Euro-zone continues to be racked by debt troubles in the weaker members of the union. (For the 1-page PDF, click here.) Portugal is the latest casualty.

The good news is that the Euro-zone is not a soccer team. The hung-over players – Portugal, Italy, Ireland, Greece and Spain – have not overwhelmed the sober German captain.

Instead, Germany has forged on. The German economy grew at 3.6% for 2010, with a short spring burst of 9%. Compare that to a 4.7% contraction in 2009. Total economic output is back to pre-Great Recession levels.

Strong exports of engineering-intensive goods to developing markets like China helped. Ironically, the weaker Euro helped German exporters who were positioned to benefit from it.

There was also a good dose of fiscal stimulus to spur local demand. Now that the stimulus tap is being shut off, we’ll wait to see the effect.

Germany is not completely isolated from its spend-thrift family. Its cost of borrowing has gone up. But the cost has gone up even more for Portugal and its ilk, better reflecting their higher risk. Alas – better late than never.

German equities rose 16% in 2010, the best of the big industrialized countries. The iShares MSCI Germany EWG ETF returned about 8% for 2010, losing the rest to the weaker Euro. More Euro weakness ahead will be positive for Germany, so we will keep EWG on our radar for tactical positions in our client’s portfolios.

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