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Is Germany catching the euro zone virus?

Suddenly, Europe’s safe haven isn’t looking all that safe.

Germany austerity euro zone 2012 6 8Enlarge
A Guy Fawkes mask graces the Justice Fountain during the Blockupy protests on May 17, 2012 in Frankfurt, Germany. Long considered immune from the crisis, and from the protests that have accompanied it elsewhere, Germany's economy is now showing signs of weakness. Is this safe haven not very safe after all? (Carsten Koall/AFP/Getty Images)

BERLIN — As the euro zone crisis lurches from bad to worse, Germany has seemed like an oasis of prosperity and stability.

Unemployment has actually dropped. Exports have boomed. Europe’s powerhouse economy has seemed almost immune from the deep economic contractions and debt spirals many of its neighbors were succumbing to.

“Germans have believed for a long time that they are invincible in the crisis,” says Sebastian Dullien, professor for International Economics at HTW Berlin – University of Applied Sciences.

That could now be over.

The latest economic news shows Germany may also be catching the euro zone virus.

Figures released on Friday show that German exports fell in April, decreasing by 1.7 percent, accelerating from a fall of 0.8 percent in March. There was even more concern about imports. Seasonally adjusted, they dropped by 4.8 percent, the worst decline in two years, indicating a possible slowdown in domestic demand.

These disquieting figures echo other bad news earlier last week. German industrial orders fell in April at their fastest rate since November 2011. The IFO business climate index fell in May for the first time in six months as concerns mount about contagion to Spain and Italy.

And the slump in Europe’s auto industry has started to affect Germany. Production fell by 17 percent in May compared to last year, while exports were down by 13 percent.

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Germany is being affected not only by the slowdown in the euro zone, which accounts for 40 percent of its exports. Its income from emerging markets may also prove unreliable. China, for one, appears to be slowing, with JPMorgan Chase cutting the country’s 2012 growth forecast again, from 8 to 7.7 percent.

“The argument in Germany has so far been that we don’t need the rest of the euro zone because we can sell so much to the emerging markets,” Dullien explains. “It is completely insane that the Germans believe their economy is independent from the euro zone.”

Yet despite these worries — compounded last week as Moody’s downgraded six German banks — the country is still seen as a safe haven. Many billions have been stashed in its banks and bonds, as European investors and depositors park their money in Germany, despite the negligible (and sometimes negative) returns.

According to the European Central Bank, deposits in Germany rose 4.4 percent as of April 30 from the previous year. In the same period, deposits in Greece, Spain and Ireland shrank by 6.6 percent. Savers in those countries are terrified that their countries might default, exit the euro zone, and end up with a hugely devalued currency, wiping out their savings.

These savers are following the lead of big investors, who have pushed down the interest rate on Berlin’s 10-year bonds to its lowest on record.

Struggling countries hope Germany will take advantage of low interest rates to help collectivize the euro zone’s debt, in the form of euro bonds, thus make borrowing for other countries cheaper. However, the German government fears that such a move would remove the pressure on the peripheral countries to cut deficits, implement reforms and improve their competitiveness.

Another downside is that Germany’s own borrowing costs would inevitably rise. “If we were to have euro bonds, then Germany would be liable in full for all the other countries, and then [Germany] would definitely lose their Triple A rating,” says Bert Van Roosebeke, senior policy analyst with the Center for European Policy, based in Freiburg.

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