Goettingen: The euro zone crisis looms like a dark cloud over Europe’s biggest economy, but Stephan Gais can’t see it. Not for now at least.
The 55-year old chairman of Mahr, a classic German “Mittelstand” firm that makes measuring instruments for the auto, engineering and medical sectors, had his best month ever in August, pulling in €18 million worth of new orders. He expects revenues to push above the €200 million mark for the first time next year, nearly double what the company hauled in at the height of the global financial crisis in 2009, when demand for Mahr’s high-precision products dried up overnight.
“We aren’t feeling it at all,” said Gais, a big man with a booming voice whose great-great-grandfather, Carl Mahr, founded the company in 1861. “Naturally we are worried about the turbulence on financial markets, because in the end, the strength of the economy is 50% psychology. You can’t underestimate psychology. But we are very optimistic heading into next year,” he told the news agency at the company’s headquarters in Goettingen, a university town in central Germany.
Like Mahr, the German economy bounced back sharply from the deep crisis triggered by the bankruptcy of United States (US) investment bank Lehman Brothers three years ago. But signs are mounting that the rebound could be short-lived.
German growth ground to a virtual halt in the second quarter of 2011 and leading economic indicators are painting a worrying picture. Last week a survey of purchasing managers suggested the country’s private sector was teetering on the brink, with business activity growing at its weakest pace in more than two years.
The threats to Europe’s economic engine are multiple. Growth is slowing in many of Germany’s top export markets as governments rein in spending to bring down high debt levels. Turbulence on financial markets has also made companies and consumers nervous. And the euro zone crisis is a growing danger, as talk of a Greek default builds and investors pile pressure on big economies like Italy and Spain.
Mix of optimism and uncertainty
Still, a more nuanced picture emerged from interviews that the news agency conducted with a half dozen or so manufacturers from the German Mittelstand - the small- and medium-sized businesses, often family-owned, that form the backbone of the economy and employ roughly two thirds of its workforce.
Many of these firms said they had used the crisis of 2009 to streamline production, make their staff more flexible and accelerate a push into faster-growing emerging markets like China and India.
They held on to key employees by making use of the government’s “Kurzarbeit” short-time working scheme - state subsidies which encouraged firms to keep workers on reduced hours. That helped them respond quickly when demand returned.
Thanks to longstanding relationships with local, cooperative banks, the Volksbanken, Mittelstand firms say they still have access to loans crucial for investment despite rising pressure on lenders to rein in credit because of the euro zone crisis. Gais at Mahr, for example, said he would seal a 5-year, €45-million credit line with a group of banks this week at an interest rate of just 3.5%.
State bank KfW forecast last week that business investment in Germany would rise 9% this year and by 4.5% in 2012, fuelled by real interest rates that are near historically low levels.
Coupled with the optimism, however, is growing frustration with chancellor Angela Merkel’s government and the sense that economic conditions could deteriorate rapidly, as they did after the Lehman collapse, if European leaders fail to act swiftly and decisively in countering their debt crisis.
Merkel managed to staunch a rebellion in her centre-right coalition on Thursday and secure parliamentary backing for an offer of more cash to back heavily indebted EU governments - but that alone will do little to shore up investors’ confidence.
Michael Schneider of Hahn Automation, a 350-strong firm in the western state of Rhineland-Palatinate which builds custom robotics for factories, said the company’s order backlog would provide it with cushion through to mid-2012 and that it had encountered no problems getting funding. “But that could change quickly if things get worse in the euro zone periphery, or if banks get spooked into a credit crunch,” he said.
Much depends on where firms get their revenues. Hahn is well placed because it relies heavily on Germany and exports to growing markets like eastern Europe, Turkey, Mexico and China.
Less fortunate may be Aerzener Maschinenfabrik, a maker of twin-shaft rotary piston machines up the road from Mahr near Hamelin - the town of the legendary pied piper. The Aerzen firm has exposure to euro zone countries like Italy and Spain, where customers are holding back on making investments.
“We are watching the euro crisis closely,” said Bernd Woehlken, a managing director at Aerzener. “We’re not seeing a direct impact, but we are seeing an indirect effect through delays in investment plans. The uncertainty is not good.”
House of cards
Klaus Abberger, an economist at the Munich-based Ifo institute who oversees its monthly survey of 7,000 German firms, does not expect Germany to fall back into recession but says the economy could contract in the fourth quarter of the year.
He says the biggest risks are a slowdown in the US, Germany’s second biggest export market, and a deterioration of the euro zone crisis.
Until now, investors have viewed Germany as a safe haven, pushing down interest rates for consumers and companies. Were the crisis to deepen however, for example through a Greek debt default that hit German banks, the country could lose its allure, with knock-on effects for the economy.
Stephan Gais at Mahr believes the chief threat comes from Europe’s politicians themselves. He accused Merkel of adjusting her euro policy based on the latest opinion polls and polemics in the media, and savaged her coalition partners, the pro-business Free Democrats (FDP), whom he voted for in the 2009 election but now dismisses as a “total flop”.
“They don’t have a plan for where they want to take Germany, where they want to take Europe,” Gais said. “I’m not at the point where I think we’ll relive what we experienced in 2009, the kind of recession we saw then. But one thing is clear - if Greece and Italy go bankrupt it will be much worse than Lehman Brothers. Then the house of cards will crumble,” he said.
“It needs to be avoided at all costs and I’m hopeful the politicians can do it. In the end they need to make clear that they want Europe, that they want the euro, and how beneficial it has been for us.”