Skip to main content
subscribers only

Once again, the euro zone's last man standing seems to defy economic gravity. Germany's most reliable indicator has puzzled economists with a surprise uptick in November. After six months of decline, the Ifo business climate index has changed tack, with both opinions on current conditions and expectations brightening slightly.

There's no reason to get too excited about the good news. The German economy isn't out of the doldrums, and neither is the euro zone. German GDP is bound to contract in the fourth quarter.

However, returning optimism in German firms may be a sign that Mario Draghi's bond-buying plan is beginning to work before it has even started, and not just for the countries it is targeting. That's because the ECB's promise to act as a lender of last resort has significantly reduced uncertainty in the euro zone.

Ironically, the staunchest critics of Mr. Draghi's plan are among the first to reap its benefits. But the fact is that German businessmen are cheering the very policies that the Bundesbank is criticizing.

Companies can begin to focus on fundamentals again. Thanks to the ECB's monetary policy and investors rushing to Bunds, credit in Germany is extraordinarily cheap. At least for medium-sized and large businesses, it is also readily available. Companies like Volkswagen now borrow at lower rates than southern European sovereigns.

This all existed before but company managers didn't care as long as the blowup of the euro area was a possibility. They didn't fancy taking risks, and shunned domestic investment. As a consequence the country has fallen back into its bad, old habits. In 2012, once again, external demand is the only real growth driver. This is in contrast with the previous three years, when domestic demand was making positive contributions as well.

While the prospect of a euro breakup is waning, periphery economies are adjusting as well. Hence the hopes that fundamentals are really improving.

There are still risks. The biggest danger is that excessive austerity in Spain and Italy might pull the euro zone down. The German government is yet to admit that this would tarnish its economic prospects significantly, through both trade and confidence channels. It would be wrong to believe that the laws of gravity do not apply to Europe's largest economy.

Interact with The Globe