Exporting goods is what has made Germany’s economy, and related exchange traded funds (ETFs) go round, but the current economic downturn has revealed what happens to an economy that is too reliant on exports.

The European Commission estimates a 5.4% drop in GDP for Germany, the largest exporter in the world, and Germany’s government projects a 6% drop, according to Economist.

Most of the damage will come from exports and this has many thinking its time for Germany to follow a new business model. The two main parties in Germany disagree, believing Germany must remain a strong exporter of goods.

But possible changes could come in either an industrial policy aimed toward domestic markets, or looser fiscal policy to increase consumption or a worldwide slowdown that could result in a correction of international imbalances, the last being the most likely of the three options.

Between 2004 and 2007, net exports resulted in 60% of growth, but the German government expects exports to fall up to 19% this year. The GDP contraction and the previous two fiscal stimulus packages will bring the budget down from balanced in 2008 to a deficit of up to 6% of GDP in 2010.

  • iShares MSCI Germany Index (EWG): down 5.8% year-to-date

ETF EWG

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.