German economy stalls as leaders meet

As the markets recover from the downgrade of America’s long-term debt, attention has turned back to the Old World. European leaders are debating the usefulness of a common euro-bond as a means of propping up the increasingly rickety monetary union.

The key question is over Eurobonds is who will be left holding the bag on the interest—or even principal—payments. Odds are it will be the same countries that are already bailing out the most indebted members.

But it is already an open secret that France is in nearly as bad condition as Italy. Outside of the eurozone, the UK is coping with riots up and down the country—rarely a sign of a thriving economy.

And that leaves Germany: the economic powerhouse of Europe; one of the few countries with a trade surplus to China; and the all-round good neighbour willing to chip in on solving the continent’s debt woes.

Except the German economy ground to a screeching halt in the second quarter, with GDP growth of just 0.1%.

“Second-quarter weakness partly reflects a correction to the unusual buoyancy of the first quarter, as construction investment corrected downwards,” wrote Timo Klein, senior economist at IHS Global Insight. “Furthermore, private consumption apparently also declined in quarter-over-quarter terms, as inflation and Eurozone debt crisis fears more than offset the stimulus provided by accelerating income growth.”

The main positive contributions to GDP growth in Q2 came from an increase in inventories and investment in equipment, Klein said.

“Let’s face it, 2Q marks a turning point in the German business cycle,” said Andreas Rees, chief German economist for Unicredit. “The period of exuberant growth is now behind us. Less dynamic momentum will be in the pipeline in coming quarters, given the slowdown of the global economy.”

He held out hope for a third quarter rebound, pointing out German companies have large industrial order backlogs that will keep them busy and help output in coming months.

Until now Germany had been growing on the backs of its world-renowned companies which were tapping export markets all around the world, including the fast-growing emerging countries.

Figures released after the German data showed that economic growth in the 17 countries that use the euro sagged to a lacklustre quarterly rate of 0.2 per cent in the second quarter.

The U.S. economy is growing at a far slower rate than previously thought while figures Monday showed Japan contracted further in the second quarter in the wake of March’s devastating earthquake and tsunami.

If there’s a silver lining to this growing dark cloud, it is quite tarnished. The increasingly soft economies of the developed world suggest the European Central Bank will follow the lead of the U.S. Federal Reserve’s on interest rates, maintaining a very accommodative stance monetary policy.