- Associated Press - Tuesday, May 15, 2012

FRANKFURT, Germany (AP) — Germany prevented the economy of the 17 countries that use the euro from falling into a recession in the first quarter of the year despite a raging debt crisis that’s raising the specter of the breakup of the currency union.

The country, which accounts for more than a quarter of the economic output in the single-currency bloc, managed to post growth of 0.5 percent in the first three months of the year against the previous quarter — equal to the U.S. rate, according to Eurostat, the EU’s statistics office.

The growth was due to Germany‘s exporters being able to offset tough conditions across Europe by gaining business elsewhere, including China and the United States. Solid domestic consumption levels also helped shore up the country’s economy, the world’s fourth-largest.

Germany propped up the ailing eurozone economy during the quarter, preventing it from falling back into recession — officially defined as two consecutive quarters of negative growth. Without it, the economy of the remainder of the eurozone would have slipped into a recession with a 0.25 percent decline in GDP, according to Commerzbank analyst Cristoph Weil.

“The euro area might have dodged recession, but it is firing on only one cylinder,” said James Ashley, senior European economist at RBC Capital Markets.

The recent round of quarterly corporate earnings highlighted how the country’s exporters were able to offset tough conditions across Europe by the rebound in global trade. Luxury carmarkers, such as Mercedes-Benz, Audi and BMW, for example, all showed strong profits on increased sales in Asia, especially China, and in the United States, where the economy is making a modest recovery.

Ironically, without economies such as Greece in the eurozone, Germany would be facing a higher-value currency, to the likely detriment of its businesses. Many economists say their country’s goods are more competitive on price because of the weakened euro than at any time in the past 30 years. The worry for German exporters is that the euro may surge if Greece exits, which would make it more difficult for them in international markets.

“Continued growth in foreign sales supports the view that the country is locked into a favorable exchange rate,” said Tim Ohlenburg, senior economist at the Centre for Economic and Business Research. “With many neighbors stagnating, the low unemployment and positive development of trade would otherwise be hard to explain.”

While Germany manages to eke out respectable levels of growth, others in the eurozone are suffering. Of the euro’s 17 members, seven are in recession: Ireland, Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Slovenia.

Though Eurostat revealed that the eurozone posted flat output in the first quarter — against expectations that it might actually slip into recession with a 0.2 percent decline — there are growing concerns that the months ahead will be as difficult as any the currency union has faced since its creation in 1999. In 2009, at the height of the global financial crisis, the eurozone’s economy slumped 4.3 percent on an annual basis.

The political turmoil in Greece has ratcheted up fears of a disorderly debt default that could lead to the country’s exit from the single currency and set off a chain reaction of contagion across the eurozone economy, including Germany.

For many, including the left-wing Syriza party in Greece, which stormed to a shocking second in last week’s general election, the answer rests on abandoning austerity — government programs that cut government spending, wages, welfare payments and jobs.

These cuts and reforms were introduced by countries including Spain and Italy when their borrowing costs on bond markets started to rise to unmanageable levels — a sign that investors are nervous about the size of their debts relative to their economic output.

Austerity is intended to address this nervousness by reducing a government’s borrowing needs. However, the concern among many in Europe is that these cuts have choked off any hope of economic growth. That matters because without growth, debt burdens can get worse even at a time of huge cuts.

New French President Francois Hollande heads to Berlin later Tuesday and is expected to press the case for a more growth-friendly approach to the debt crisis when he meets German Chancellor Angela Merkel. Kick-starting economic growth was a central plank of Mr. Hollande’s electoral platform, not just in France but across Europe as a whole.

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