The mood among German institutional investors gauged by the ZEW research group has turned sour after months of improvement. They fear the debt crisis will worsen as anti-austerity forces gain ground in the eurozone.
The ZEW institute's closely watched barometer of investor sentiment nosedived to 10.8 points in May after five straight months of gains that peaked at 23.4 points in April.
The research group, which is based in Mannheim in southern Germany, polled about 300 analysts and financial investors for the monthly survey, and said that they saw rising "economic risks" from the eurozone debt crisis which had emerged in recent weeks.
"It may have contributed to this month's decline that the outcome of the elections in Greece and France has made it more doubtful that European governments will resolutely fight the sovereign debt crisis," ZEW president Wolfgang Franz said in a statement.
In light of recessions in many eurozone countries, Franz said that investors considered it import to pursue austerity measures with "sound judgment" as growth and consolidation wouldn't "contradict each other."
The sharp drop in German investor confidence has come as a surprise, as economists surveyed about the index before its publication had expected a less steep decline to 19.8 points.
However, future expectations appear to be bleaker than warranted. Investors' assessments of the current situation were rather bright, causing the ZEW barometer of current moods to increase by 3.4 points to 44.1 points compared with the month of April.
ZEW's index has been criticized recently for being too volatile and based on weak data compared with other confidence indices, such as Markit's Purchasing Managers' Index (PMI) or the wider known Ifo Investor Confidence Index which is based on 7,000 responses.
Last week, Ifo published its index, showing investor confidence in Germany rising for the sixth consecutive month and a marked increase in positive opinions about eurozone economic developments.
Nevertheless, some analysts said the ZEW index pointed to a softening of growth in Germany after Europe's biggest economy grew by 0.5 percent in the first quarter of 2012.
"After strong growth in the first quarter of this year, Germany is likely to head towards a slowdown in the middle of the second quarter," Christian Schulz, analyst for Berenberg Bank told AFP news agency.
However, confidence could "rebound again quickly," he added. if the Greek situation is resolved and the new French president continues a "crisis-fighting partnership" with Germany.
And Andreas Scheuerle, analyst with DEKA Bank told the same agency that positive assessments of the current situation could be prompted by key German business indicators such as production output, factory orders and exports "all pointing upwards" in March surveys.
uhe/mll (AFP, AP, dpa)