Safety first. That simple principle has propelled investors – in droves – into German government bonds. The 10-year Bund yield is a paltry 1.3 per cent, compared with more than 4.5 per cent four years ago. But nothing lasts for ever, and Europe’s crisis is far from resolved. Should investors question the longevity of Germany’s haven status?
There are two possible threats. The first is the country’s own economic performance. This has been formidable during the past two years, with gross domestic product expanding 3.7 per cent in 2010 and 3 per cent in 2011. Even so, activity slowed in the second half of 2011 as the eurozone crisis intensified. And in spite of a first-quarter rebound, the extent to which domestic-led growth can compensate for the unpredictable external situation remains uncertain. True, yesterday’s export figures were encouraging: surprisingly robust exports and a pick-up in imports. An undervalued exchange rate is also a big help. But that said, some of Germany’s industrial behemoths – such as Siemens – are cautious.
The second threat is its role in propping up the eurozone. Germany’s gross debt reached 81 per cent of GDP last year, compared with 65 per cent in 2007. But contingent liabilities stemming from eurozone crisis resolution mechanisms could push the figure much higher. Its share of guarantees for the EU bailout funds and the European Central Bank’s securities markets programme would add more than 5 percentage points, for example. That is before the Spanish bailout package and any allowance for further state recapitalisation of Germany’s own banking sector.
