German investor confidence falls

By GEIR MOULSON Associated Press Writer

BERLIN (AP) - Worries about the economic impact of Europe's debt crisis hit investor confidence in Germany hard in May, a closely watched survey showed Tuesday.

The ZEW institute's confidence index, which measures investors' expectations for the next six months, slid to 45.8 points in May from 53 in April. Though that was the seventh decline in eight months, the index remained well above its historical average of 27.4.

ZEW president Wolfgang Franz said the drop "may reflect the rising uncertainty of consumers and investors with regard to the measures aiming at consolidating the public budgets in the euro zone."

He also said the euro's sharp fall in value in recent weeks may also have added to the uncertainty - on Monday, the euro slid to a four-year low of $1.2237 as investors fretted about the ability of a number of eurozone countries getting a handle on their borrowings.

The survey comes in the wake of last week's EU-led euro750 billion ($1 trillion) rescue package to help euro zone nations avoid default, which was coupled with calls - not least from Germany - for countries to make cutting budget deficits a priority.

ZEW, or Center for European Economic Research, said expectations were lower after May 10, the day the package was agreed, with experts apparently concluding that austerity measures "will have a dampening effect on demand" that will only partly be compensated for by the positive impact a weakening euro will have on exports.

Germany, Europe's biggest economy, has enjoyed a modest recovery over the past year as a global upturn boosted demand for its exports. Output grew by 0.2 percent in the first quarter compared with the previous three-month period.

ZEW said investors' assessment of Germany's current situation brightened significantly in May, with a subindex measuring that view rising by 17.6 points to minus 21.6.

Despite the lower expectations, experts "expect German business activity to continue its recovery within the next six months," thanks to recent increases in exports and industrial production, ZEW said. But experts also consider other countries' debt problems "a major risk for German business activity."

The ZEW index's still-healthy level argues against an "abrupt end" to the upturn, said Alexander Koch, an economist at UniCredit in Munich.

However, he said "the subdued growth outlook for a number of important EU neighbors and increasing evidence that the upswing also in dynamic emerging Asia has passed its peak indicate a moderation of the German economic recovery later this year."

The German government has put austerity firmly on the menu at home too.

Following the euro rescue package and a state election defeat for her center-right coalition, Chancellor Angela Merkel last week said there could be no tax cuts until at least 2013 - backing off what was once a key plank in her government's platform.

She said that "consolidating the budget will become the priority," but has yet to specify where cuts might be made - although she has rejected a conservative ally's suggestion that education spending could be targeted.

ZEW surveyed 275 analysts between May 3 and May 17.