Germany's business confidence stable, but big euro risks loom

21 May 2010 15:30  [Source: ICIS news]

TORONTO (ICIS news)--Germany’s business confidence was almost unchanged in May, from April, despite the eurozone financial budget crisis, an economic research institute said on Friday.

However, the Munich-based Ifo economic research institute warned about an “incalculable risk” for Europe’s largest economy from the €750bn ($926bn) euro rescue package to help Greece and other troubled eurozone countries. Germany’s upper house (Bundesrat) approved the package on Friday, following earlier approval by the lower house (Bundestag).

The Ifo institute’s business climate indicator for Germany in May was 101.5, compared with 101.6 in April. The indicator is based on 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and retailing.

“The firms are just as satisfied with their current business situation as they were in the previous month. … The economic recovery in Germany is robust,” the institute said.

However, firms assessed their business outlook “minimally less favourable than in April”, it added.

In manufacturing the business climate had improved further from April, and manufacturers were also more optimistic about their outlook for the coming six months, Ifo said.

In a separate statement, Ifo said it saw no systemic risk for the euro. While the euro had fallen sharply against the US dollar and other currencies in past weeks, it was still overvalued in terms of purchasing power parity. “Its true value lies at around 1.14 [US] dollars,” it said.

“It was not the euro that was endangered in the crisis but rather the ability of the European debtor states to continue to finance themselves on such favourable terms as Germany”, said Ifo president Hans-Werner Sinn.

However, with the euro rescue package, Germany would now de facto be assuming liability for the debts of the other euro states, Ifo said.

The package - which involves German guarantees of up to €148bn - directed capital to the debtor states and hindered investments in Germany, it said.

In addition to the direct budgetary risks, these guarantees would have further “problematic results for the German economy”, it said.

“The rescue package is an incalculable risk for Germany and is sure to slow its growth,” Sinn added.

Germany’s chemical industry trade group, VCI, earlier this week increased its 2010 chemical production forecast to 8.5%, from its earlier projection of 5% growth, after a stronger than expected first quarter.

But the group also warned about risks to growth from a possible setback in EU export markets. The EU is the German chemical industry’s largest export market.

($1 = €0.80)

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