The following article is from our September 2010 issue.

Things are looking up (for now) Germany reports encouraging figures but what if… – By Uwe Jean Heuser

The economy is growing and even consumer spending has turned a corner. Yet the underlying dangers remain. Banks are uncontrolled and unstable, and foreign markets anything but robust.

As late as April, the German government was forecasting 1.4 percent GDP growth for this year. At the time, that seemed optimistic. In the fall, when the government’s next official forecast is due, those numbers may more than double. Germany’s economic output could expand by 3 percent. Carmakers, machine builders, you name it – many industrial firms are producing full tilt again, needing every pair of hands they can find, and are glad they kept most of their staff on.

Germany, it now seems, is the tractor pulling Europe out of the mud. Tax revenues will grow with the economy. Budget deficits should shrink, thereby banishing the risk of runaway public debt. And booming exports are not the only factor driving the economy. Wages, which have stagnated for years, are rising again and analysts expect them to result in greater consumer spending for the year.

Nowhere in Europe is business as good as between the Rhine and Oder, yet the latest data was better than expected throughout the EU. Even for the Greeks, compelled to adopt thriftier ways, hope has returned. The crisis must be over, right?

It is not – especially if one sees the crisis as a profound disruption. The economy is growing again, and those who prefer to limit their definition of the crisis to an economic contraction can now proclaim its end. But the real damage has yet to heal.

That is plain to see, first of all, in the area where the crisis began: in the financial sector. Former German Chancellor Helmut Schmidt has argued that the crisis will have passed only once this sector is effectively regulated, so that fears of another crash finally dissipate. Yet Europe, otherwise known for its craving for stability, is still far from embracing this kind of regulation. Germany has used every opportunity to demand fresh standards but has enacted fewer measures than the US Congress, which the Germans never thought would get tough with the banks.

Germany has yet to solve another problem, one that it uniquely faces. The worst-off banks in Germany are not the privately held ones but state-owned institutions, in particular the regional Landesbanks. Although they urgently need to dissolve most of these lenders, to date the federal and state governments have done little to clean up this ailing sector.

The crisis will not be history until the financial sector’s woes have been overcome. It is also not yet over because states may have rescued their economies for the time being, but have exhausted themselves in the process.

Above all, the US government soon will no longer be able to pay for continued growth but the private sector doesn’t seem able yet to stand on its own feet. Despite all of Washington’s stimulus efforts, unemployment has remained stubbornly high, and now the economy is sputtering too. Economists question whether the Federal Reserve can still avert a looming slide into an extended period of stagnation.

That is bad news for the rest of the world, for two reasons. First, American demand for imported goods would fall if the country slides back into recession. Also, the US has been the frontrunner in this crisis: It was where the financial meltdown started. The US slid into recession first and got back out relatively early, too. In other words, whatever happens there reaches the other industrialized states after a period of delay.

It has been a typical pattern. The fears for America in August came at a time when many investors and analysts were already celebrating the demise of the crisis – just as the mood was upbeat in the winter, shortly before Greece threatened to collapse and pull all of Europe down with it. Aftershocks can happen anytime. No one can say for sure that the danger has passed.

Of course, another global slump is anything but certain, but neither can it be ruled out. The US real estate market is anything but healthy. The same holds true for Europe’s public debt. And China is struggling with a financial bubble inflated by the country’s booming housing market. If economies seriously falter, these problems would worsen overnight.

Crises are times of great uncertainty and that has yet to pass, too. Germans may be famous for their caution but even now, leading industrialists are preaching circumspection. Spare us the boundless optimism, said Jürgen Hambrecht, the head of chemicals maker BASF. “We are seeing a slowing recovery in the US and Asia will also grow more slowly in the second half of the year,” he warned.

Fears are spreading in Germany that its exporters are too dependent on China, whom they thank for the lion’s share of their currently flourishing business. What if the economy there loses steam?

The upswing in the West cannot yet erase the effects of the crisis. Even if German GDP growth hits 3 percent this year, by the end of 2010 the economy will still have not equaled its size at the end of 2007. Meanwhile, the government is beginning to cut expenditures – especially for welfare recipients.

That brings us to the next chapter of the crisis, namely the question of who will pay for it. Nothing on the social spending side has been reformed or improved.

As much as one would want to hear or say otherwise, anyone sounding the all-clear now would be ignoring the serious dangers that still exist. Even if the big banks are doing big business again, the financial sector remains vulnerable. And even if economies in Europe and Asia are expanding, it’s still a shaky climb on the taxpayer’s dime.

The German inclination to be cautious is – for once – justified.