Germany: An outbreak of optimism

Hall 11 at the Frankfurt Motor Show is the BMW hall. It stages an automotive fashion show, a car catwalk.

To a changing beat - techno or background filmic - cars are driven around an elevated 300m track against a curved screen of urban backgrounds. Here is a glimpse of the future; electric cars, hybrids, even solar-powered vehicles. The area is teeming with people.

You cannot run a motor show without optimism. It is, after all, in the business of selling dreams. Yet, reality intruded. Car sales in Germany are down 6.6%. They are down 9.8% in France. Sales figures for PSA Peugeot Citroen in August were down 17.3%.

Only the Brits - once again gorging on credit - buck the trend.

BMW, like some other German manufacturers, has offset tough conditions in Europe with increased sales in the United States and the emerging markets of Asia, but the message was clear: "Germany is not an island; it is part of Europe and cannot be immune."

I thought of the motor show when, on Tuesday morning, I noted an outbreak of optimism from the German Finance Minister, Wolfgang Schaeuble. He is a politician steeped in realism. Yet, writing in the Financial Times, he was busy celebrating success.

The doom-mongers were wrong, he said. All the austerity, the structural repair work was paying off, laying the foundation for sustainable growth across Europe.

The eurozone crisis, in his view, is as good as fixed.

"In just three years," he writes, "public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end".

It is fair to say there are some green shoots but as the President of the European Central Bank, Mario Draghi, said recently: "I am very cautious about the recovery, I can't share the enthusiasm... these shoots are very very green."

Troubles remain

Wolfgang Schaeuble, when I spoke to him at the end of last year, thought we were 60% through the euro-zone crisis. It is, of course, election time in Germany, and it is worth recalling in any discussion on Europe that after all the stats have been analysed there is still politics. It is the dimension so often missing from the calculations in Brussels.

Just in the past few days Greece's innate political instability has been laid bare.

Wolfgang Schaeuble has been sounding very upbeat

Doctors, teachers and other workers are on strike over cuts to public services. The jobless rate is still rising. There are clashes between the far-right and the far-left.

In Italy the government of Enrico Letta hangs by a thread as supporters of Silvio Berlusconi threaten to bring down the coalition. Following Berlusconi's conviction for tax fraud they are fighting the likelihood that he will be barred from public office. For the first time in a year Italy's borrowing costs have climbed above those for Spain.

Even a northern European country like the Netherlands is cutting its growth forecast for next year. This year the economy is predicted to contract by 1.25%. In the pipeline is a pay freeze for civil servants and welfare cuts which will reduce demand, and unemployment will stay rising.

These are just a few examples of the troubles which continue to haunt the eurozone.

Mr Schaeuble's analysis is based on what happened in Germany. Fifteen years ago the country was the "sick man of Europe".

He says correctly that Germany transformed itself by making its labour market more flexible, restraining spending and reforming social security.

It worked in Germany, but the rest of Europe is not necessarily Germany. And there's the rub. Unable to devalue inside a monetary union, many countries are left with the only alternative - internal devaluation, slashing wages and spending.

Unemployment is at unprecedented levels. It will not seriously come down until growth exceeds 1.5%, and that is not on the horizon.

Will Europe have the patience for these reforms to work? That is a known unknown and is the stuff of politics. That could still dent an outbreak of German optimism.