German boom creates ECB policy nightmare as south lags

A separate report by Simon Ward from Henderson Global Investors said eurozone indicators are showing "unprecedented divergence", with the M1 money supply booming at double-digit rates in Germany but contracting in Spain, Ireland, and Greece.

S&P said Germany has been able to lever recovery off the emerging market boom, leaving Southern Europe behind. German exports – mostly machines and cars – account for 47pc of all EU goods shipped to China. France is a distant second at 10pc.

"Germany is recovering brilliantly," said S&P's Jean-Michel Six. "Its products are not price-sensitive to the exchange rate. It is entering a virtuous circle where exports lead to capital spending, leading in turn to consumption after years of quasi death."

S&P said the ECB is likely to heed German demands for tightening to nip inflation in the bud, creating a serious test for eurozone states still trapped in recession. "There could be a sharp jump in the euro exchange rate the next 12 months," it said.

While France has held up better than its Latin neighbours, it is losing global export share and is facing autumn strife as reforms spawn mass protest. The stoppages are costing up to €400m a day.

The risk for Europe is that the benefits of German recovery come more slowly than the pain of German-led rate rises. Mr Six said there are echoes of the 1992 Exchange Rate Crisis when Frankfurt tightened to cool over-heating at home, causing such severe strains for others that the system ruptured – though he believes monetary union is strong enough to weather any storm.

Bundesbank chief Axel Weber is already restless. He criticised the ECB move in May to buy Irish and Club Med debt and has called for a rapid exit from emergency measures.

It is perverse that Germany should have an ultra-loose monetary policy at a time when it faces an incipient credit boom and unemployment has dropped to the lowest since the early 1990s (7.5pc), but critics say this is the logic of EMU. A one-size-fits-all policy caused the South to overheat in the early phase of the euro.

Now the roles are reversed – with a difference this time. Germany was able to claw back competitiveness by squeezing labour costs while the South luxuriated in low rates and lost its advantage. German industry is unlikely to be so obliging.

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