GERMANY IS PLAYING ITS PART / THE WALL STREET JOURNAL ( VERY HIGHLY RECOMMENDED READING )

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JUNE 24, 2010, 5:02 A.M. ET.

Germany Is Playing Its Part

By RICHARD BARLEY

Is Germany doing enough? Nearly every indicator shows Europe's largest economy, accounting for 27% of euro-zone GDP, staging a strong recovery. And despite the austerity headlines, it is loosening fiscal policy this year. But that hasn't stopped calls for Germany to do more to help ease the pain in southern Europe and offset the impact of austerity. Those calls are wide of the mark.

The raw numbers are impressive: in April, German industrial production was up 13.9% from a year earlier, helping to drive euro-zone output up 9.5%, the biggest rise since records began in 1990. Unemployment fell to 7.7% in May, the lowest since December 2008. Crucially, German firms are boosting investment, with more firms planning to create jobs than reduce them for the first time in two years, according to the DIHK German chambers of commerce. German growth could hit 5% on an annualized basis in the second quarter, according to J.P. Morgan. That should offset slower expansion in France and Italy to keep euro-zone growth at 3%.

Part of this is down to luck. Germany's export-led focus on capital equipment exposes it to demand emerging from Asia, currently the key driver of global growth. The decline in the euro is helping: already highly competitive, Germany has enjoyed a 7% depreciation in its real effective exchange rate, thanks to the extent of its trade with countries outside the euro zone, versus just between 2% and 3% for Spain, Portugal and Greece, ING notes.

But a lot is down to policy. Previous restraint is paying off; German firms and consumers are not over-leveraged. While there are doubts over the capital strength of some banks, Germany has the balance sheet to plug the gaps if necessary. It is the only major government bond issuer whose triple-A rating has not been questioned.

All of this is good news for the continent. Germany's strength has allowed it to provide a credible anchor for the European rescue package. Record low German Bund yields also benefit corporate borrowers throughout the euro zone. And German fiscal policy is also helpful: an €18 billion ($22.16 billion) tax cut this year will halve the impact of overall euro-zone fiscal tightening to just 0.2% of the bloc's GDP, Bank of America-Merrill Lynch notes. Recently announced budget cuts for 2011 account for just 0.2% of German GDP.

Germany has already done a lot to rescue the euro zone—and may yet be forced to shoulder further fiscal burdens in support of its profligate neighbors. An uncompetitive or overindebted Germany is not in Europe's interest. Germany can't afford to become complacent about its position; but a key ingredient in spurring domestic investment and consumer spending is to foster macroeconomic confidence. On this score, it has got a lot right.

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