As the sovereign debt crisis in the euro zone has intensified in recent months, Germany has found itself in an interesting position. As cash-strapped economies have buckled under the weight of their massive debt burdens, they have looked to the larger and more financially stable countries for aid. And Germany has emerged as the de facto leader of that bloc, stepping in to foot a significant portion of the bill for bailout funds (see Six ETFs To Watch As The Greek Drama Unfolds).
Germany may be in far better shape than many of its euro zone colleagues, but its fiscal health is still cause for concern–particularly with anxiety over the impact of the “euro drag” on regional and even global growth intensifying. So investors were eager on Monday to hear Berlin’s plans for addressing its own debt situation, hoping that the nation of some 82 million people will continue to shine as a bright spot in an otherwise dismal Europe.
German Chancellor Angela Merkel has announced that the government plans to implement almost $100 billion in austerity measures over the next four years in an effort to comply with constitutional requirements and alleviate concerns over the viability of the common currency system. The austerity measures include €11.2 billion in cuts in 2011, €19.1 billion in 2012, €24.7 billion in 2013 and €26.6 billion in 2014.
Merkel noted that the measures, which some see as severe, “are necessary for the future of our country.” According to Vice-chancellor and Foreign Minister Guido Westerwelle, the measures don’t include an increase in the income tax of value-added tax, although a tax on airline passengers and utilities that operate nuclear power plants were included. Instead, the majority of the savings is expected to be generated through cuts to spending, including lower social welfare and unemployment benefits.
Germany ETF In Focus
In the wake of the controversial formation of a bailout fund for highly-indebted nations the steep German austerity measures are likely to meet a fair amount of resistance, especially after the government pledged that austerity measures in 2011 would be “higher than strictly necessary.” But the government’s ability to successfully implement the proposed plans will go a long way in guiding the iShares MSCI Germany Index Fund (EWG), which has plummeted along with the rest of Europe in recent months.
EWG is linked to the MSCI Germany Index, a benchmark that consists of about 50 of the largest and most liquid German equities. As one of the world’s largest exporters, Germany actually stands to gain considerably from a weakened euro, but any gains from the currency’s freefall have been more than offset by an increase in the level of risk associated with all euro zone equities (see Three ETFs For Euro/Dollar Parity).
EWG is now down about 17% in 2010, much better than ETFs focusing on Spain and Italy, but an abysmal performance nonetheless. Monday’s announcement of the roadmap to a more acceptable balance sheet was generally cheered by investors–EWG was up slightly in mid-morning trading–but serves only as a first step towards reclaiming the ground lost on the year.
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Disclosure: No positions at time of writing.