Peer Steinbrueck, the front man in Germany’s fight against the financial crisis, has a new challenge on his hands: Karl-Theodor zu Guttenberg. The young economy minister, in the job for only a month, is already proving to be a thorn in Finance Minister Steinbrueck’s side. The telegenic 37-year-old is coming up with policy initiatives that challenge Steinbrueck’s plans, and draw media attention away from him.

This is new territory for Steinbrueck. Until last month, he was able to capitalise on the low profile of former economy minister Michael Glos to make himself Germany’s primary spokesman on matters financial and economic — and the man Chancellor Angela Merkel turned to for leadership on these issues. Glos’s shock resignation last month opened the way for Guttenberg to make the step up from Bavarian politics to the national stage, and he hasn’t looked back.

This week he proposed amending a planned law on saving stricken banks, which was drafted by Steinbrueck’s ministry, to try to avoid nationalising them. The idea may not take off, but it grabbed media attention. And while Steinbrueck (wiping face in picture) joins other G20 finance ministers this weekend for a meeting in England, Guttenberg  (left in picture) will be preparing for a trip to the United States next week, where he will meet Treasury Secretary Timothy Geithner — Steinbrueck’s opposite number — as well top White House adviser Lawrence Summers, IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick.

“Peer Steinbrueck has to share the crisis management with high-flyer Karl-Theodor zu Guttenberg — much to his displeasure,” ran a headline in Friday’s edition of the Handelsblatt business newspaper.

With a federal election looming in September, Guttenberg is using every opportunity he can to boost his profile. As a member of the conservative Christian Social Union (CSU), Bavarian sister party to Merkel’s Christian Democrats, he is naturally more politically allied with the chancellor than Steinbrueck, a Social Democrat. His suave demeanour and aristocratic background are a contrast to Steinbrueck’s plain-speaking approach, and his media blitz could start to drown out Steinbrueck’s message.

“Like fire and water, these two”, Handelsblatt wrote.

(Reuters photo: Fabrizio Bensch)

Europe’s leaders can no longer rely on the argument that German resilience will cushion the blow to the continent from the worst global recession in just about anyone’s living memory.

Germany’s economy, Europe’s largest, is now officially confirmed as the basket case of Europe, thanks to a plunge in demand for high-tech goods, stagnant domestic demand, and a strong currency.

Having shrunk by 2.1 percent in the fourth quarter alone compared with 1.5 percent for the 16-member euro area, Germany will hold for a brief period over the weekend the dubious title of the fastest contracting economy in the developed world.

That is, until Japanese GDP data are published on Monday.

Trading floors in Tokyo must be bracing for a very ugly morning indeed. Already expected to shrink by 3.1 percent on the quarter — or a staggering 11.7 percent if stretched over an entire year — the risks are high that the hole in the world’s second largest economy turns out to be even bigger.

Pioneer’s decision on Thursday to cut 10,000 jobs and exit the business of manufacturing flat-screen televisions was an ominous sign of just how quickly world demand is falling away for the high-tech manufactured goods that have made Germany and Japan famous.

And there is little reason to believe that with unemployment soaring across the globe, that demand will rebound any time soon.

German and Japanese policymakers gathering in Rome for the G7 finance ministers’ and central bankers meeting must be very worried that if there is no respite soon for the euro or yen, it will take a very long time to recover from this downturn.

The world’s second largest economy, Japan, and Europe’s largest, Germany, all of a sudden have a lot in common. 

Their most striking resemblance in recent weeks is the breathtaking speed of economic decline, with output ransacked by a collapse in world demand for high-quality manufactured goods and an overvalued currency.

The fundamental problem is simple and doesn’t take an economist’s model to explain. At this stage of the financial crisis, who wants to replace a fully-functional Audi they bought a few years ago? What’s wrong with the 2007-vintage Sony PlayStation connected to the two-year-old Bravia or Grundig flat-screen TV? And who in their right mind would want to import the stuff in bulk when the euro and the yen are so expensive?

It’s very simple, but somehow analysts remain nearly universally stunned.

News that German industrial production plunged by 4.6 percent in December, nearly double the Reuters consensus and the steepest decline since 1989, triggered much handwringing. “Really horrific”, one analyst gasped. “Pretty horrible”, another muttered. “Devastating”, another shrieked.

Those were more or less the same words used to describe the near-10 percent collapse in Japanese industrial production, driven by the same trouble from those same frugal global consumers. Compounded, of course, by even more thrifty domestic consumers, as in Germany.

Perhaps the ever-hawkish European Central Bank, which did not think it necessary to seriously consider cutting rates this month, is now warming to the idea that Germany’s economy has completely frozen over.  ECB über-hawk Axel Weber appeared to be sporting a more dovish feather earlier on Tuesday — but only after flying halfway around the world to give a speech in Kuala Lumpur.

“We should not at this point avoid to lower rates aggressively, because we understand at the current juncture all indicators look like the economy is in free fall,” Weber said.

Perhaps the ECB may have more than one 50 basis point interest rate cut left to deliver after all?

How well is your finance minister doing as the global economy comes tumbling around your ears? Finns, at least, can hold their heads up with pride: Jyrki Katainen (pictured on ice) has topped The Financial Times’ annual rankings of European finance ministers.

Results for the G7 members of the group were mixed. Germany’s Peer Steinbruck came second, despite a poor showing on politics, and France’s Christine Lagarde was seventh. Britain and Italy languished at 14 and 16, respectively, although at least UK Chancellor of the Exchequer Alistair Darling can boast of coming first in politics. Something to do with élan, apparently.

The European Commission has been pretty gloomy about the prospects for European Union economies in recent days. Its latest forecast last week was for the 15 countries of the euro zone to grow by just 0.1 percent next year. For the 27-nation EU as a whole – this time incorporating the likes of Britain, Poland and Sweden – the number was only slightly better at 0.2 percent.  In fact, the Commission said the outlook was bleak. “The horizon,” said Monetary Affairs Commissioner Joaquin Almunia, “is dark.”

Simon Tilford, chief economist at the Centre for European Reform, reckons it may be even darker than the Commission expects. The Commission, he says in an article, has a tendency to be slow to downgrade its forecasts, and much of what it said last week was already looking out of date when released. “The indications of an unprecedented slump in economic activity are multiplying all the time.”

Tilford reckons the forecasts for Germany and Spain — the euro zone’s first and fourth largest economies, respectively – are among the most out of sync. Germany, for example, is seen standing still. But Tilford asks where such strength as even that will come from given the economy’s reliance on exports and a projected dive in global trade volumes. As for Spain, he wonders how a decline in output can be held to the Commission’s minus 0.2 percent with unemployment rising rapidly, industrial production tanking and construction and housing activity collapsing.

All this, Tilford says, shows that the Commission is too complacent about the state of the European economy. What it needs is to cajole member states that have run up large surpluses and strong fiscal positions to boost demand. “Current account surpluses are not sustainable in the present climate,” he concludes.

Josef Ackermann, Chairman of the Institute of International Finance and the head of Deutsche Bank, says he’s confident leaders from around the world will take needed steps to bringing normality to the world’s struggling financial system.

“I am pretty sure that the governments will guarantee parts of the whole sale funding and that should actually tell people that there is no risk and you don’t lose money while investing in other banks and I think that is important,” the head of Germany’s largest bank said Sunday.

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Josef Ackermann , the top dog at the association representing the world’s multinational financial institutions, had just finished taking questions from reporters at a press conference for more than an hour.

As he stepped off the stage, dozens of journos, including yours truly, surrounded him.

So many, in fact, he didn’t know who to answer: (more…)