Markets and economic events have a way of humbling even the most confident forecaster.  It seems like an eternity ago we were talking about the troubles of Greece, with Germany being the enforcer to make sure Greece did not default on the €330 billion ($370 billion) that it owed to various European creditors. 

Now, some are saying that Germany faces what is shaping up to be a bigger economic blow than Greece could have ever been.  The scandal at Volkswagen over emission cheating is looking to cost the automaker up to EUR 100 ($112 billion) in fines and penalties, according to one estimate.  That number pales however to the potential costs in lost direct sales and pending lawsuits that will keep the automaker occupied for years. 

Certainly there is a sense of justice when it comes to senior managers who either knew or should have known about what Volkswagen has already admitted are obfuscations about emissions performance.  But what about the macro effects on Germany?

The automotive industry is, to put it mildly, a core industry of the German economy.  According to a study done in 2008, the auto industry accounted for 7.7% of the German economy while most other European countries were between two and four percent.  This number includes peripheral business related to the auto industry.

After enjoying the benefits of a weak euro for most of the year, German exports were down 5.2% in August – far worse than expected by markets and the biggest decline since 2009.  The release also shows Germany’s exposure to the slowdown in China, which is its third largest trading partner.  And to pile on the bad corporate news, Germany’s largest bank reported a large quarterly loss that will most likely result in it suspending its dividend – a dividend that it paid even through the financial crisis.

My View: Clearly Germany is having a hard time.  It shows that even countries with good financial discipline will never get away from economic surprises; we can only do our best to react to them in the most appropriate way. 

Finally, we are happy to report that we are on track to close our merger with the Royal Bank of Canada on November 2.

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