German investor confidence plunged in June on concern that the sovereign debt crisis will undermine export prospects and crimp growth in Europe’s largest economy.

Greece’s near default has prompted governments from Berlin to Madrid to implement budget cuts to convince investors they can tame deficits, threatening to damp demand and hurt the region’s economic recovery. While the euro’s 15 percent drop against the dollar this year may boost exports outside the currency region, the 16-nation bloc is Germany’s most important market.

“Investors are now worried that governments will kill off the recovery with their austerity measures,” said Jens Kramer, an economist at NordLB in Hanover. “While they realize that the budget deficits have to be reined in, it’s almost impossible to do that without slowing down growth, particularly among Germany’s main trading partners.”

Support for Chancellor Angela Merkel’s coalition plummeted to a record low in a poll of German decision makers published today.

Criticism of Merkel

Merkel, criticized for her handling of the European debt crisis, her budget-cutting measures and infighting in her government, drew the lowest support of her chancellorship, according to the Allensbach survey published in Capital magazine. A majority of Germans expect the ruling alliance to fall apart before the next federal election, an Infratest-Dimap survey published June 12 showed.

The euro initially fell after the report before rebounding to $1.2259 at 12:30 p.m. in Frankfurt. European stocks also recouped losses to trade higher. Germany’s benchmark DAX index has gained 5 percent in the past week.

For now, Germany’s economy is showing few signs of discomfort, with the unemployment rate unexpectedly falling to 7.7 percent last month as companies ramped up production and added workers to meet booming orders. ZEW’s gauge of current conditions rose to minus 7.9 from minus 21.6 in May.

‘Long-Term Average’

The headline ZEW number “is not as shocking as it seems,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Yes, it’s a big drop, but it’s still around the long-term average” of 27.4, he said.

The Bundesbank on June 11 raised its growth forecasts, predicting expansion of 1.9 percent this year and 1.4 percent in 2011, up from 1.6 percent and 1.2 percent respectively.

Continental AG, Europe’s second-biggest car-parts maker, on June 10 increased its sales-growth estimate for this year to more than 10 percent after business through May was stronger than the company expected.

“The decline in ZEW expectations, together with recent falls in business and consumer sentiment, is a worrying sign for the future,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “Fears about peripheral debt are damaging sentiment towards core euro-zone economies.”

Greece Downgrade

Greece’s credit rating was cut to non-investment grade by Moody’s Investors Service yesterday, threatening to further undermine demand for the nation’s assets as it struggles to rein in the euro region’s second-biggest deficit.

Fitch Ratings last month stripped Spain of its top AAA credit grade and questioned the nation’s ability to grow its economy as the government reduces spending.

The debt crisis is making banks wary of lending to each other amid concern financial companies own too many bonds from Europe’s most indebted nations. That’s driving up interbank lending costs, which may reduce the flow of credit to companies and households.

Europe’s banks will have to write down 195 billion euros of bad debt by 2011, on top of the 444 billion euros of writedowns they have already logged, the European Central Bank said on May 31.

Praktiker AG, Germany’s second-biggest home-improvement retailer, said last month it expects sales to drop further at its stores in Greece as the government implements budget cuts worth 14 percent of the country’s gross domestic product.

“We better get used to the idea of considerably slower growth from the end of this year,” said Andreas Moeller, an economist at WGZ Bank in Duesseldorf. “Germany’s economy is overly reliant on exports, and the crisis is pulling the rug from under its feet.”

By Gabi Thesing

Tags: business, debt crisis, economic recovery, euro zone, european central bank, european economy, european stocks, germany, investors, unemployment rate

This entry was posted on Tuesday, June 15th, 2010 at 11:04 am and is filed under Debt, Global Economy, Global Financial, Market Finance, european economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.