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Does Germany Have the Power to Save Europe's Economy?
A walk down memory lane reveals the last two times Europe hitched its recovery wagon to Germany's rising star.

By Nico Isaac
Fri, 11 Jan 2013 17:30:00 ET
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Without question, Germany, the world's third-largest economy, closed 2012 in a year-end tour de force. 

Consider these statistics:
 
·         Germany's DAX soared 29% in 2012 to become the best-performing market in Europe.
·         Germany's employment just surpassed the 41 million mark, the highest level ever on record.
·         German business confidence has risen for the past two straight months.
 
And now, folks want to know whether the stellar performance is the bearish curtain call Germany – and the rest of Europe – has long awaited.
 
Well, according to the mainstream financial experts, the answer is a resounding "Yes!"
 
The way they see it, not only is Germany putting the dark days of contraction behind it; it's also leading the Continent as a whole into the light of recovery. In a recent Barron's cover story, "Bullish on Europe in 2013," the faith in Deutschland is plain as day:
 
"Germany's is Europe's standout economy, an economic engine firing on all cylinders fueled by demand for exports."
 
What's less plain to the naked eye is how familiar the German-led comeback mantra is throughout recent history. Not only is the sentiment recycled; so are the "Germany as an economic 'engine'" semantics.
 
For instance, we go back – way back – to this Jan. 1, 2000, New York Times observation:
 
“As we prepare for the 21st Century, a united Germany is the economic engine that will drive all of the European Union and is recognized by its peers as Europe’s future world power.”
 
What happened next is burned into the pages of history: The engine of Germany – and that of the entire global economy – misfired, sputtered and crashed. The region endured record-high unemployment, business contraction, recession and the worst stock market crash since the Great Depression, including the complete shut-down of the Germany's high-tech Neuer market and a 60%-plus plunge in the DAX to an eight-year low.
 
Now let's turn to the summer of 2007. The DAX had surpassed its 2000 high and was on its way to a new record. Once again, the experts hitched their jumper cables to Germany's supposed high-powered engine.
 
"In contrast to seven years ago," assured one news source at the time, "the market is not besotted by euphoria. German shares have plenty of room to breathe." (Der Spiegel)
 
Another expert claimed Germany was set to replay the rapid, post-World War II expansion known as the new economic miracle: "Wirtschaftswunder 2.0: A New German Economic Boom" (Der Spiegel)
 
One credit to the 2007-2009 global financial crisis is a 50%-plus sell-off in the DAX to a five-year low.
 
As we can now see, it's one thing to claim Germany as the economic superpower that will rescue all of Europe. It's quite another to have the objective facts to support such a claim.
 
For the past two months, Germany has been the primary focus of The European Financial Forecast's long-term analysis of the economies across the pond – namely, whether one of the most critical utility sectors of Germany's economy, power prices, confirms a recovery.
 
The first chart below comes from the December 2012 issue of Elliott Wave International's flagship European market publication. It plots the stock price of Germany's largest and second-largest power producers (E.ON and RWE, respectively) and reveals whether the four-year rally in the DAX provided the necessary boost to these key markets.
 
The second chart – this one from the January 2013 issue of The European Financial Forecast – reinforces the message by plotting the DAX against power prices in Germany.
 
 
 
Find out whether Germany really has the power to save Europe's economy today in our latest issues of The European Financial Forecast.
 
 

 



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