Are German indices pricing in the secession of a member of the Eurozone?
The answer to that question, undoubtedly, is yes. But whose exit?
The DAX 30, Germany’s core financial index composed of the 30 largest publicly-traded German firms, is certainly narrow. However, it is widely perceived to be as reliable an indicator of wider economic performance in Germany as the FTSE 100 is in Britain.
A quick look at the 5 year progression of this German index certainly tells a story. Having halved in value from above 8,000 points in mid-2007, it fell to below 4,000 in the first quarter of 2009. It currently stands at just above 6,000, more than 2 years since it last hit that level.
No doubt the ongoing Eurozone crisis is the core reason for this continuing depression of stock prices. Talks of a Greek exit, followed by linked tensions regarding Spain and Italy’s national debts, have left speculators uncertain, and barely buoyed by strong domestic industrial data (the German economy has experienced just one quarter of negative growth since the end of 2009, and that was a modest -0.2% in Q4 2011).
The question that is just beginning to seep into the markets is how speculators, who have at least a limited understanding of the impact of a Greek exit from the Eurozone, might price in the possibility of a German exit.
As this FT Alphaville article suggests, it is a possibility that may even be being discussed by the German political elites as we speak. Der Spiegel, a major German publication, reported recently that a German ministry of finance report suggested that a German exit would lead to a GDP reduction of up to 10% in the first year, along with record surges in unemployment.
A German exit remains distinctly unlikely. However, its possibility, however tenuous, may be enough to keep speculators wary of sizeable long bets. A permeation of such a sentiment could even elevate such a fear to that of a self-fulfilling prophecy, whereby fear keeps the market pinned until the event is finally undertaken and Germany can finally grow again.
This particular possibility could be a fascinating sub-plot to the ongoing European drama, the next scene of which is the upcoming European summit.