News coming out of Europe has been pretty bleak this year, to say the least. As if Greece’s debt woes weren’t bad enough, dismal news from Ireland, Portugal and Spain (the so-called PIGS) further complicate Europe’s debt mess. Fortunately, good news emerged from the euro-zone in the form of second-quarter reports that indicated stronger-than-expected gross domestic product (GDP) growth.

Germany may be the country in Europe where the economic news is the most encouraging. The country notched an unexpected surge in GDP that helped to give a much-needed boost to the struggling euro-zone. With Germany serving as the economic engine, the combined second-quarter 2010 GDP of the 16 countries that use the euro jumped an average of 1%, compared to the first quarter of 2010, and 1.7% versus the second quarter of 2009. The gains mark the fastest economic growth for the euro-zone in four years.

One way to take advantage of the economic gains in Germany is to invest in the iShares MSCI Germany Index Fund (EWG). This fund seeks to provide investment results that correspond to the price and yield performance, before fees and expenses, of the publicly traded securities in the German market, as measured by the MSCI Germany Index. The index itself seeks to measure the results of the German equity market. It is a capitalization-weighted index that aims to capture 85% of the publicly available market capitalization. As you can see from the chart below, the fund has been beaten down lately amid the market’s retreat. When market conditions improve, EWG likely will benefit nicely due to Germany’s economic gains.

In addition, the fund is well diversified through its holdings in a wide array of companies and sectors. Its top ten corporate holdings, as of July 30, are: Siemens AG-REG, 10.62%; E On AG, 7.11%; BASF SE, 7.1%; Allianz SE-REG, 7.02%; Daimler AG, 6.43%; Bayer AG, 6.29%; Deutsche Bank AG-REG, 5.11%; Deutsche Telekom AG-REG, 5.07%; SAP AG, 4.5%; and RWE AG, 3.89%. EWG’s five biggest sector holdings, also as of July 30, are: financials, 19.36%; industrials, 15.63%; consumer discretionary, 14.83%; materials, 13.66%; and utilities, 11.31%.

Rising GDP growth, consumer confidence and business confidence in Germany are upbeat signs. Increased demand from around the world for German products helped its economy to grow 2.2% in the second quarter -- marking the fastest quarterly rate since the country’s reunification in 1990. That growth rate beat expectations by almost an entire percentage point.

German consumer sentiment is set to rise in September, fueled by positive news on the economy, market-research group GfK reported on Aug. 26. Germany’s consumer confidence index for September 2010 edged up to 4.1 points, up from the previous month, according to an Aug. 26 article from The Wall Street Journal. The August 2010 consumer confidence index previously had been reported at 3.9 but GfK revised it to 4.0 points.

Business confidence in Germany rose in August, despite a global slowdown that could hurt demand for the country's exports, the research institute Ifo reported. Ifo’s German business-climate index rose in August to 106.7, up from 106.2 in July, to reach the highest level since mid-2007, when the first warning signs of the financial crisis had yet to emerge. Analysts polled by Dow Jones Newswires had forecast an index reading of 106.0.

One concern is whether Germany’s current economic growth is sustainable. Certain economists think that Germany’s economy has been fueled by temporary factors such as a rebound in construction. Although construction gains may continue through year-end 2010, they may fade a bit in 2011.

Another concern is that Germany's budget deficit more than doubled in the first half of 2010. The Federal Statistics Office, Destatis, announced that the government budget deficit for the first half of 2010 rose to €42.8 billion ($54.2 billion), or 3.5% of gross domestic product. The rising deficit reflects the cost of bailing out German banks during the financial crisis. Roughly €900 million of the deficit stemmed from bad debts of Düsseldorf-based WestLB. Those WestLB debts moved to the balance sheet of Soffin, the country’s bank rescue fund. However, the deficit still is below original finance ministry estimates for 2010 of around 5% of GDP, due to the economy having rebounded better than government officials expected, according to an Aug. 25 article in The Wall Street Journal.

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