The German economy grew five times more than economists forecast in the first quarter as exports to emerging markets offset waning euro-area demand.

Gross domestic product in Europe’s largest economy rose 0.5 percent from the fourth quarter, when it fell 0.2 percent, the Federal Statistics Office said in Wiesbaden today. Economists predicted a 0.1 percent gain, according to the median of 40 estimates in a Bloomberg News survey. French GDP stagnated.

With the euro region’s debt crisis ravaging economies from Greece to Spain, German companies have shifted focus. Carmakers and their suppliers are benefitting from demand in faster- growing markets such as China, while falling unemployment and rising wages are stimulating spending at home. Business confidence rose for a sixth month in April after company earnings outpaced expectations in the first quarter.

“With this morning’s numbers, the German economy has not only avoided recession but could have even helped prevent the entire euro-zone economy falling into technical recession,” said Carsten Brzeski, senior economist at ING Group in Brussels. One thing is at least for sure: the German economy remains the powerhouse of the euro-zone economy.”

The euro extended gains after the GDP report, rising as high as $1.2856 from $1.2823 earlier this morning.

Fillip for Merkel

Evidence of an improving economy is a fillip to Chancellor Angela Merkel as she prepares to host French President Francois Hollande in Berlin today. Hollande, who travels to Berlin immediately after his inauguration in Paris, won election after campaigning against Merkel’s austerity drive in favor of more focus on growth.

The debt crisis has already pushed eight euro-region countries into recession, commonly defined as two consecutive quarters of contraction. France said today it recorded zero growth in the first quarter, in line with economists’ median forecast. Austria, Slovakia, the Netherlands and Italy will release GDP figures this morning before the European Union’s statistics office publishes euro-area data at 11 a.m.

The 17-nation economy probably shrank 0.2 percent in the period after contracting 0.3 percent at the end of last year, according to the median of 38 forecasts in another Bloomberg survey conducted before today’s German report.

Euro-Area Stagnation?

“The euro area could get away with stagnation in the first quarter,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Today’s data mean German growth forecasts for this year have to be massively revised up,” he added.

Germany’s economy will grow 0.7 percent in 2012 and 1.7 percent in 2013, the European Commission forecast on May 11. By contrast, the euro region’s and those of seven member countries will contract this year, it said.

The German statistics office said first-quarter growth was mainly driven by net trade as exports rose. Domestic consumption also increased while investment declined. A detailed breakdown for the quarter will be published on May 24. From a year earlier, GDP increased 1.7 percent.

Germany’s benchmark DAX Index (DAX) has climbed 9.4 percent this year, compared to a 1 percent gain in the Stoxx Europe 600 Index. Earnings at companies listed on Germany’s HDAX Index (HDAX) of the country’s most highly capitalized stocks beat analysts’ estimates by an average 7 percent in the first quarter, with carmakers and their suppliers surprising most.

‘Rosy’ Outlook

Earnings per share at Volkswagen AG (VOW), Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) exceeded expectations by as much as 52 percent. Continental AG (CON)’s Chief Financial Officer Wolfgang Schaefer said on May 3 that Europe’s second-largest auto-parts maker may raise its sales forecast next quarter should the stable development continue.

“World trade will pick up in the second half of the year, the global economy should become stronger and Germany will benefit from that,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “The outlook is quite rosy, with above-average growth but also above-average inflation rates.”

Annual consumer price gains in Germany have exceeded the European Central Bank’s 2 percent limit since January last year and Bundesbank President Jens Weidmann said in an interview with Sueddeutsche Zeitung published May 11 that inflation may be higher than in the past.

Wage Deals

That may weigh on consumer sentiment, even as unemployment holds at the lowest level in two decades and workers are securing some of the biggest pay increases in that period. Germany’s two million public-service workers negotiated 6.3 percent higher pay by the end of next year, and IG Metall, whose 3.6 million members make it the biggest union in Europe, is demanding a 6.5 percent raise.

Metro AG (MEO), Germany’s biggest retailer, reported a wider- than-expected first-quarter loss on May 3 after cutting prices of electronics goods to win back shoppers. Still, companies from Hugo Boss AG (BOS) to Beiersdorf AG (BEI) reported they are profiting from increased consumer spending.

“The domestic economy is still benefiting from an improving labor market and higher wage deals, which are strengthening consumption,” the Bundesbank said last month. “The German economy is currently lacking momentum, even though it’s in good shape overall.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity.

Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.

“The government would have to stand by the program,” Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. “If there are dramatic changes in circumstances, we wouldn’t close ourselves off to a debate over extending the deadlines.”

Greece’s post-election impasse multiplied the signs of stress in European markets yesterday. The euro fell for the 10th time in 11 days and stocks surrendered a two-day gain. Bond yields in recession-wracked Spain, the next potential candidate for financial support, touched a five-month high.

“The euro breakup story is gathering steam again,” Marchel Alexandrovich, a senior European economist at Jefferies International in London, said in a research note. “If Greece were to ever exit the euro, no amount of reassuring comments will convince investors that other countries won’t soon follow.”

‘Two-Way Street’

Greek President Karolos Papoulias will call party leaders together today, the ninth day of post-election maneuvering, to make the case for a government of prominent non-politicians. The head of the biggest anti-bailout party, Alexis Tsipras, will attend after boycotting yesterday’s bargaining sessions, state- run NET TV reported.

“Solidarity is a two-way street,” European Union Economic and Monetary Commissioner Olli Rehn said. “ We expect that the commitments are respected and the fiscal targets are a core part of the commitments.”

Greece’s caretaker government will also announce whether it will repay 436 million euros due today on a note held by investors who shunned its bond-loss accord. Paying the holdouts in full would anger investors who took losses in this year’s debt restructuring, while withholding payment could be construed as default.

‘Big Problems’

Investors pummeled Greek stocks, pushing the ASE Index (ASE) down 4.6 percent to 584.04 yesterday, the lowest since November 1992. The drop extended last week’s 11 percent plunge.

“Greece needs to elect a pro-reform and pro-austerity parliament or I foresee big problems,” Dutch Finance Minister Jan Kees de Jager said. “There is no room to weaken the agreements by reforming less or reducing spending cuts.”

Questions for European policymakers include whether to ease the conditions linked to Greece’s financial infusions in order to keep it in the euro or, if that fails, how to contain the damage of what would be an unprecedented exit.

No answers emerged last night. As in early 2010 when the first Greek bailout and broader rescue fund were improvised, the way forward will be charted by top political leaders. Their next summit is May 23 in Brussels, the 18th since the debt crisis exploded.

German Chancellor Angela Merkel, the dominant figure in two years of crisis containment, said Greece will “always” be part of the European Union, a 27-nation bloc with a common market, business regulations and trade policy. Speaking to a school group in Berlin yesterday, she didn’t offer the same assurance about Greece holding on to the euro, saying only that “it’s better for the Greeks to stay in the euro area.”

Spanish Recession

The once-taboo issue of a Greek departure or expulsion from the 17-nation currency union burst into the public debate last week, when European Central Bank officials including Patrick Honohan of Ireland aired the pros and cons.

Greece’s predicament magnified doubts about the health of Spain, the only euro country to remain mired in recession through 2013, according to European Commission forecasts published last week.

Ten-year Spanish yields rose as high as 6.36 percent before settling at 6.23 percent yesterday, compared with 6.01 percent at the end of last week. The extra yield over benchmark German levels widened to 477 basis points. Spain’s woes helped drag up Italian 10-year yields to 5.71 percent from 5.51 percent.

President Hollande

The euro ministers saluted Spain’s newfound resolve to clean up its banking system and agreed that “speed is of the essence” in completing that process, Juncker said.

Another political turning point comes today, when Francois Hollande is sworn in as French president in the first power shift to the Socialists in the second-biggest euro economy since 1981.

Hollande’s bid to inject a pro-growth element into the austerity-dominated approach to the crisis got a boost on May 13 when Merkel’s party was drubbed in elections in Germany’s largest, most industrial state, North Rhine-Westphalia.

The regional vote maintained the rival Social Democrats’ hold on the upper house of the German parliament and gave them leverage to prod Merkel into concessions before ratifying a euro deficit-limitation treaty, one of her hallmark crisis-fighting initiatives.

Hollande campaigned against that treaty as well, pledging to flank it with pro-growth measures at a time of 10.9 percent unemployment across the euro zone, the highest since the currency’s debut in 1999.

‘Painful Defeat’

Merkel, set to host Hollande in Berlin today hours after his inauguration, said she won’t alter her approach to the crisis in the wake of her party’s “bitter, painful defeat.”

Also held up until France’s new government takes office are appointments to a vacancy on the ECB’s Executive Board, of a successor to Juncker as chairman of euro finance meetings and of the manager of the European Stability Mechanism, the future permanent rescue fund.

Juncker opened the nomination process for the ESM post yesterday. He doubted a new euro finance chairman would be named before the end of June.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net Josiane Kremer in Brussels at jkremer4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net