After a tough 2015 for the European Union, Germany and its neighbors are facing a number of economic challenges heading into 2016. Germany continues to be the stabilizing force in the European economy. However, that economy continues to remain sluggish, with the eurozone falling back into deflation in 2015. The Greek debt crisis caused major concerns for global markets during the summer of 2015. Germany and Europe also face a crisis with Syrian refugees coming to the country. Relocating these refugees will be very costly.
Greek Debt Crisis
The Greek debt crisis reared its ugly head once again during the summer of 2015. The crisis has been going on since 2010. After a number of elections and referendums, a bailout agreement was finally reached between Greece and its creditors. The possibility of a Grexit was narrowly averted with the approval of the bailout. This is Greece’s third bailout since 2010; the first two cost around 240 billion euros.
The third bailout agreement came with some stringent requirements. Greece will need to adopt significant economic changes, including raising the retirement age, cutting pensions, the opening and liberalization of energy markets, and expansion of a property tax. Some of these requirements are deeply unpopular within the country. While the government has adopted some of the austerity measures, it remains to be seen whether Greece is capable of making the significant economic reforms required to stabilize its economy.
The Greek government must still pass more laws to comply with the terms of the bailout. Relations between Greece and the rest of Europe remain fragile. Angela Merkel, the German chancellor, is facing increasing pressure to limit any future bailouts to Greece. Although the situation is calm for now, it could reignite at any time.
The eurozone economy continues to falter and will continue to be a pressing concern for Germany in 2016. Germany has the strongest and most stable economy in the eurozone. However, that means Germany is often required to provide economic assistance to the rest of the region. Further European economic issues could begin to have a negative impact on Germany’s economy.
Economic data released in September showed that consumer prices dropped, which took many by surprise. It was the first drop since the European Central Bank (ECB) launched its massive bond-buying program in March. The drop raised concerns about a slide into a deflationary environment. European leaders want to avoid deflation at all costs. The concern is that deflation could cause a feedback loop of falling prices and lower consumer spending. This would make it difficult for European governments and businesses to repay debts.
The negative economic data placed more pressure on the ECB to increase quantitative easing by buying more bonds. The purpose of the quantitative easing was to raise inflation by increasing the supply of money while reducing borrowing costs. Under the current program, the ECB is buying around $67.4 billion a month in bonds. The ECB cut a key interest rate further below zero, whereby the banks now charge their depositors 0.3% to hold money overnight. This also means that shorter-term debt in the eurozone actually has negative yields. It remains to be seen whether the eurozone economy will improve in 2016.
Syrian Refugee Crisis
The Syrian refugee crisis will be another major issue for the German economy in 2016. It is expected that around 1 million Syrian refugees will come to Germany in 2015. It will cost Germany an estimated minimum of $20 billion to accept and house the refugees. Merkel had initially supported an open-door refugee policy that would allow every legitimate refugee possible to be welcomed into the country.
However, as of mid-November, Merkel appeared to bow to political pressure within Germany to work to place limits on the number of refugees entering the country. The Paris terrorist attacks created security fears about the flood of refugees. In addition, the significant cost of relocating the refugees would fall heavily on German shoulders. Merkel voiced support for working with Turkey to fight against refugee traffickers, as well as improving conditions at refugee camps in Turkey and neighboring countries. The Syrian refugee crisis will continue to be a humanitarian and economic concern for Germany in 2016.