The Commission's half-hearted balancing act

Yesterday’s announcements show that austerity will not be stopped in the Eurozone. Only the pace will be slowed down.


It was supposed to be the big showdown. The first occasion for the European Commission to prove that the fiscal and structural framework of the Eurozone has more bite than before. Throughout the crisis, the European Commission has secretly and subsequently received more power to intervene in national fiscal policies and to ensure sound public finances. Two-packs, six-packs, fiscal compacts and European semesters are highly complex and complicated but hard to explain to non-experts. In short, all these new measures and agreements are aimed at denationalizing Eurozone policymaking without moving towards a real political union, giving the Commission an even more important role. Yesterday’s announcements were such a tangled mass consisting of facts, decisions and recommendations that it is hard to distill the essences. Here is a first attempt.

Let’s start with the most important announcement: seven EU countries will be given extra time to bring down their budget deficits. France, Spain, Poland and Slovenia will be given two additional years to bring their fiscal deficits below the 3% GDP threshold, while Belgium, Portugal and the Netherlands received one additional year. According to the Commission, Belgium only narrowly avoided a fine as “no effective action” to correct the deficit had been taken over the past three years. Interestingly, the latest Commission forecasts had presented a structural fiscal adjustment in Belgium by an average of 0.4% of GDP between 2010 and 2012, as ¾% of GDP were required. At the same time, the Commission announced that Italy should be able to leave the so-called excessive deficit procedure this year as the deficit had been brought below 3% of GDP last year.

To be clear and as expected, the European Commission did not propose an end to austerity. To the contrary, the official communication sent a clear message by for example saying that “Europe needs fiscal consolidation – sustainable growth cannot be built on unsustainable debt”. The pace is slowing down, focus is shifting from nominal deficit targets to structural efforts and the nature of fiscal consolidation (expenditures vs revenues) will become more important but austerity will not go away.

Next to the fiscal monitoring, the Commission also announced the so-called country-specific recommendations. The second pillar of the new macro-economic surveillance framework aimed at increasing growth prospects. These recommendations go beyond the headline figures on debt and deficit levels, touching on sensitive areas of national policy such as wage-setting, social and welfare spending.

Technically-speaking, the two pillars are not linked with each other as recommendations on fiscal policies are more binding than the recommendations on structural reforms. However, the Commission yesterday cleverly tried to combine the two. In the case of France, for example, the two additional years to bring the deficit back to 3% of GDP were linked to a “strengthen the long-term sustainability of the pension system by further adjusting all relevant parameters. In particular, the planned reform should be adopted by the end of this year…”. Moreover, France should back the fiscal consolidation by further structural reforms. This sounds like strong language, but it is doubtful that the Commission would really be willing to walk the walk. In fact, last evening, French President Hollande already stated that it was not the Commission’s role to dictate structural reforms.

It seems as if the Eurozone’s path towards a better functioning fiscal and structural framework with a clear distinction between national and Eurozone responsibilities will not be an easy one. For now, the European Commission remains on a tightrope walk, trying to combine economically-justified flexibility with the credibility of the new framework. The risk of this half-hearted strategy is obvious: the slower pace of austerity might be too little to make a difference for the economy but enough not to accelerate structural reforms, while at the same time undermining the credibility of the new fiscal framework

German labour market remains stable in May

Hanging loose? German unemployment dropped by a non-seasonally adjusted 83,400 in May, bringing the total number of unemployed to 2.937 million, the lowest level since December 2012. In seasonally-adjusted terms, unemployment actually increased by 21,000, still keeping the seasonally-adjusted unemployment rate unchanged for the eighth consecutive month at 6.9%.


Despite the stable unemployment rate, it remains noteworthy that the non-seasonally adjusted drop was the weakest May performance since 2005. To some, this is a clear warning that the debt crisis is finally taking its toll on the German labour market. In our view, however, the weak spring revival of the labour market can also be explained by the relatively high number of public holidays in May and the still cold weather. Therefore, it is far too premature to start singing Swan Songs on the labour market.

In fact, the German labour market remains the show case example for successful labour market reforms. Even the current success has also received a helping hand from strong export growth and the first wave of ageing, the reforms of the mid-2000s are still paying off. Up to the early 2000s, the German economy required growth of at least 1 ½ % to create new jobs. In recent years, GDP growth rates of less than 1% were sufficient for job creation. This bodes well for the near-term outlook, indicating that despite an expected GDP growth rate of only roughly 0.5% this year, the labour market should remain stable. At the Eurozone level, it is obvious that the success of its own structural reforms will further encourage the German government to continue hammering on structural reforms.

In our view, the acceleration of private consumption in the first quarter was more than a simple one-off. Latest wage settlements indicate that nominal wages in the entire economy should increase by around 3% this year. With an expected inflation rate of below 2%, real wages look set to increase for the second year in a row. Domestic demand should continue to be an important growth driver this year.

Ifo points to growth acceleration in Germany

The day ahead of the all-German soccer Champions League final looks like an all-German macro day. Third important data released this morning was the Ifo index. Germany’s most prominent leading indicator, measuring business sentiment, increased sharply to 105.7 in May, from 104.4 in April. While the expectation component remained unchanged, current expectations spurred to 110, from 107.2 in April; the strongest monthly increase since July 2010.

Despite many negative readings from the Eurozone, the last two months have delivered a couple of positive news from the German economy. New orders have increased in February and March, industrial production improved and companies increased their production plans. In fact, since the beginning of the year, we have seen a rather contradictory up-and-down of soft and hard data and it almost required a fog lamp to predict the future path of the German economy. Now, the fog is clearing up. A weather-inflicted catching up of industrial activity, particularly construction, combined continued private consumption could deliver decent growth in the second quarter.

However, the big unknown in the equation remains the export sector. Earlier this week, the Association of German Chambers of Commerce and Industry released the results of a survey showing that German exporters lost some optimism. ONly 30% expect export volumes to increase, while some 10% even expect a decline. The stagnation of the French economy, accounting for around 10% of German total exports, and worrying signals from China could prevent a sharp pick-up in exports. Fortunately, the US economy, the biggest non-euro trading partner, is currently doing better than expected.

All in all, today’s data bode well for the short-term. Growth should accelerate in the second quarter, on the back of domestic demand. However, on the day ahead of the all-German Champions League final, let’s not forget that the German economy without exports is like Barcelona without Messi: a good team but not a champion.

Spending the recession away

The second estimate of the statistical office confirmed that the German economy avoided a technical recession (of two consecutive negative quarters) only barely. GDP growth in the Eurozone’s biggest economy came in at 0.1% QoQ in the first quarter, from a 0.7% decline in the last quarter of 2012. Growth was driven by private consumption (up by 0.8% QoQ), while investments were down by 2.4% QoQ, mainly driven by a sharp decline in construction. Net exports still contributed 0.1 pp to first quarter growth.

German consumers remain the silent helpers of the economy. Often forgotten, ignored and labelled as had-beens, German consumers have become an important growth driver. In fact, private consumption grew in each since quarter since 1Q 2012.

Looking ahead, all ingredients are in place to see a continuation of solid consumption. The labour market remains stable. Contrary to the rest of the Eurozone, German unemployment has hardly increased (yet) and employment remains close to its record highs. In addition, the increase in real wages, which started last year, should accelerate this year, driven by nominal wage increases of around 3% and low inflation. It therefore does not come as a surprise that this morning’s GfK index posted another increase, pushing German consumer confidence to its highest level since 2007.

Unfortunately, the positive trend of private consumption is anything but a spending spree and Germans are still unlikely to become a bunch of shopaholics. This means that despite all delight, this morning’s data also hold an inconvenient truth which interdicts any euphoria:  without its exports, the German economy is currently only like a sports car without sixth gear.
 

German economy leaves contraction, but only barely

The German statistical office just released its first estimate of 1Q GDP growth, showing that the economy has left contractionary territory. German GDP grew by 0.1% QoQ in 1Q, from a 0.7% decline in the final quarter of 2012. On the year, the economy shrank by 1.4%. The GDP components will only be released on 24 May but available monthly data and the statistical office’s press release suggest that consumption was the sole growth driver. Investment and construction were drags on growth.

The first three months of the year were bumpy but at least ended with a small happy end for the economy. Hard data could not entirely live up to the expectations soft data had raised. The reason for this decoupling of hard and soft data is clearly the weather. The harsh winter weather did not only affect the construction sector but indirectly also other sectors.

Looking ahead, prospects for the German economy are further clearing up. The industry is gaining pace as order books have started to fill again and companies are cautiously stepping up their investment plans. Moreover, domestic demand with the solid labour market and wage increases have become a reliable growth driver.

All in all, the German economy has left recessionary territory quickly again, even if it has not been a vintage performance so far. The strong interconnection between the German economy and the weather remains remarkable. Not only has the harsh winter weather taken a huge toll on the entire economy, the economy also seems to copy recent weather variations. In fact, maybe the recovery is just like this year's springtime. First it is delayed, then it comes with ups and down and when it is finally here, hardly anyone notices.

ZEW worse than expected but still positive

Turning the tide? After a batch with worsening sentiment indicators over the last months, today’s ZEW index provides first tender evidence that the tide is turning again. The ZEW index which measures investors’ confidence increased marginally in May to 36.4, from 36.3 in April. Its absolute level is clearly above the historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 8.9, from 9.2 in April; the second consecutive drop.

In the past, the ZEW index did not have the best track record when it comes to predicting German economic activity. In fact, since 2006, the index had a tendency to “miss” the periods of strong growth. However, since mid-2011, however, the components of the ZEW and the Ifo have broadly stayed in tune. With this in mind, today’s data is encouraging for the growth outlook of the German economy.

Doubts about the strength of the German economy have almost become a new ritual at the beginning of each year. Indeed, over the last couple of years, the economy has often had a rusty start. Sometimes due to the euro crisis, sometimes due to the weather. In the end, however, the economy always managed to leave (almost) all problems behind.  Even if the recovery is not yet as strong as in earlier years, it still looks as if the German economy’s resilience will prevail again this year.
 

Die Rueckkehr des Dicken?

German IP points to rebound in 1Q

Signs of life. The German industry is bucking the trend of negative news across the Eurozone. German industrial production increased by 1.2% MoM, from an upwardly revised +0.6% MoM in March. On the year, industrial production is still down by 2.5%. As expected, the construction sector suffered enormously from the harsh winter weather, dropping by 3.1% MoM, after a 1.6% drop in February. Production in all other sectors, however, was up.


The German industry has stabilised further since the turn of the year, even if the rebound is still bumpy. Industrial production excluding the construction sector is now finally above its fourth quarter level. At the same time, however, the construction sector suffered from the harsh winter weather and it is not over, yet. According to the latest European Commission indicators, German construction firms still suffered from the weather in April. The weather-inclined rebound should be delayed once again.

Looking ahead, however, prospects for the industry are clearing up again. Even if producer confidence deteriorated recently due to new Eurozone unrest, production plans are improving. Moreover, new orders increased significantly in March (2.2% MoM; actually the first increase in two consecutive months since March 2012. On top of that, capacity utilisation rebounded in the first months of 2013 and German companies have started to cautiously step up their investment plans.

A week ahead of the release of the first estimate of 1Q GDP growth, the bean counting has begun again. The available hard data provides evidence that the German economy should have left recessionary territory again, even if it has not been a vintage performance so far. Private consumption has increased on the back of low unemployment and wage increases and net-exports have also been growth-supportive so far. Despite renewed Eurozone uncertainty and slightly erratic confidence indicators, the German economy should have left the contraction behind.

All in all, the German economy and the weather seem to be closely linked. Not only has the harsh winter weather taken a huge toll on the entire economy, the economy also seems to copy recent weather variations. In fact, maybe the recovery is just like this year’s springtime. First it is delayed, then it comes with ups and down and when it is finally here, hardly anyone notices.

Beiers gevaar voor Angie

Bayern München is de nieuwe grootmacht in het Europese voetbal. Dominantie en succes horen bij het Beierse zelfbesef. Beieren is de motor van de Duitse economie en het bewijs dat Lederhosen en moderne technologieën bij elkaar passen. Beieren is ook een grootmacht in het Duitse politieke landschap. Een bolwerk van Angela Merkels christendemocraten. Maar na jaren van lusten dreigt Beieren nu een gevaar te worden voor Angela Merkel. Beieren belast letterlijk haar herverkiezing.

Beieren en belastingen zijn in Duitsland hét thema. Eerst bleek Uli Hoeneß, de bekende en populaire baas van Bayern München, met zwart geld in Zwitserland op de financiële markten te hebben gegokt. En nu is er ook een hele affaire over Beierse politici die ruimhartig familieleden in hun hofhouding hebben opgenomen. Terwijl dat laatste tot voor kort juridisch gezien niet strafbaar was, heeft het tot een grote morele verontwaardiging geleid. Er zijn inmiddels zelfs politici voor opgestapt.

Wat voor outsiders misschien op een regionaal vuurtje lijkt, is een buitenkans voor de roddelpers en kan tot een uitslaande bosbrand leiden voor Angela Merkel. Beieren was altijd al een beetje anders. Het is niet alleen een Duitse deelstaat, maar ook een vrijstaat in Duitsland. Een vrijstaat die sinds de Tweede Wereldoorlog bijna als een monarchie wordt gerund. Een monarchie onder leiding van de CSU - de Beierse zusterpartij van Angela Merkels CDU - die elf van de zestien regionale verkiezingen sinds 1946 met een volstrekte meerderheid heeft gewonnen. De grootte van Beieren maakt dat de CSU bij nationale verkiezingen snel 7 tot 10 procent van alle stemmen wint. Bijna elke conservatieve bondskanselier heeft een sterke Beierse CSU nodig om verkiezingen te winnen.

Belastingontduiking en nepotisme doen het nooit goed in Duitsland. Zeker niet vlak voor verkiezingen. Sowieso hebben steeds meer Duitsers het idee dat kleine dieven ijzeren ketenen hebben en grote dieven gouden. De oppositiepartijen waren al eerder begonnen aan een campagne voor sociale rechtvaardigheid en zullen niet nalaten dat vuur aan te wakkeren. Door de Beierse affaires bleef zelfs de owngoal van de oppositie - plannen voor een forse belastingverhoging na de verkiezingen met rijken- en vermogensbelastingen à la française - tot nog toe zonder voelbare schade.

De Duitse verkiezingen worden nog zeer spannend. Anders dan veel buitenlandse commentatoren denken, is het verre van een gelopen race. Een derde termijn als kanselier voor Merkel zal niet afketsen door haar eigen fouten, maar kan elk moment stuklopen door kleine, onvoorspelbare affaires buiten haar bereik. Er is echter kans dat Merkel ook die affaires overleeft. In de Duitse geschiedenis werd er maar één conservatieve politicus bondskanselier zonder een absolute meerderheid van de CSU in Beieren: Angela Merkel, in 2009.

Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

Letter from Brussels - Eurosklerose

 Mit den ersten Sonnenstrahlen ist auch die Grippewelle in Brüssel abgeklungen. Die Freude über den späten Frühling und die neue Gesundheit währt allerdings nicht lange. Eine längst vergessene Krankheit ist wieder im Anflug: Eurosklerose.

Vor 30 Jahren machte sich eine wirtschaftliche Krankheit in Europa breit, dessen Symptome hohe Arbeitslosigkeit, Rezession und düstere Wachstumsprognosen waren. Eurosklerose war damals das Pseudonym für Hoffnungs- und Ratlosigkeit. Genau diese macht sich auch jetzt wieder bei den Euro-Rettern breit. Der große Befreiungsschlag in der Eurokrise will einfach nicht gelingen.

Bisher wurde versucht, die Krise mit einer Art partieller Akupunktur zu meistern. Kleine therapeutische Nadelstiche, meist gesetzt durch die EZB, haben das Gröbste abgewendet, sorgen aber noch nicht für schnelle Genesung. Deshalb versuchen die Euro-Retter im Augenblick die bereits gesetzten Nadeln zu lockern. Das sogenannte Spardiktat steht wieder unter Beschuss. Zu Unrecht, denn es gibt kein Spardiktat, sondern ein Krisenmanagement, das aus Schuldenabbau und Strukturreformen besteht. Natürlich ist es sinnvoll die Geschwindigkeit des Sparens den wirtschaftlichen Bedingungen anzupassen, aber eine Abkehr der Politik von nachhaltigen Staatsfinanzen zurück zu schuldenfinanziertem Wachstum wäre ein verheerendes Zeichen. Im Übrigen würde es die fundamentalen Probleme eines spanischen Immobilienmarktes, der griechischen Staatsfinanzen oder mangelnder italienischer und französischer Konkurrenzfähigkeit auch nicht lösen.

Heilung durch Akupunktur kann gelingen, erfordert aber viel Geduld. Geduld und Kraft, die durch das Streben nach einer gemeinsamen (besseren) Zukunft aufgebracht werden kann. Vielleicht hilft dabei ein Blick in die Vergangenheit. Die Eurosklerose wurde letztendlich durch ein gemeinsames Projekt besiegt: den Euro.


Diese Kolumne wurde eher in der Wochenzeitung "Euro am Sonntag" veroeffentlicht.

Adjustment continues...but not everywhere

At the end of an exciting week, just two interesting charts, stemming from the European Commission's almost undiscovered data treasure on cost and price competitiveness indicators.

The structural adjustment, Commissioner Olli Rehn mentioned in today's press conference, is indeed continuing. All four Eurozone peripheral countries (IR, GR, PT and SP) have experienced a significant catching up of their cost competitiveness positions vis-a-vis the rest of the Eurozone. However, there are two countries where the adjustment has not even started. Looks as if the Eurozone is heading towards its next big problem...

Chill-pill from Bratislava

The ECB cut the main refinancing rate from 0.75% to 0.5% and the marginal lending rate – the rate at which banks can borrow overnight – from 1.5% to 1%. At the same time, the ECB left the deposit rate unchanged at 0%. The long-awaited relief for SMEs was not presented, yet, only hinted at.


Listening to the ECB’s macro-economic assessment, hardly anything seems to have changed compared with the last rate-setting meeting in April. As regards the economic analysis, the only change was the ECB’s acknowledgement that the economic weakness had extended “into spring”, compared with “into the early part of the year” in April. Interestingly, for the first time, labour market weakness made it into the ECB’s introductory statement. Cynics could argue that the ECB is moving further towards the Federal Reserve’s dual mandate.

As regards the inflation outlook, the ECB took note of the latest drop in headline inflation to 1.2% YoY but still sees risks to the outlook for price developments as broadly balanced.

Today’s rate cut mainly provides support for peripheral banks and could boost confidence marginally. However, to some extent, today’s rate cut does not fully fit into the ECB’s normal pattern of forward-looking policy. Judging from Draghi’s comments and taking them at face value, the rate cut was rather motivated by lagging than by leading indicators.

Next to the rate decision, a lot of market attention was on any ECB action to restore SME funding. Here, the ECB announced that the fixed rate tender procedures will continue to be conducted with full allotment at least until 8 July 2014. Although the ECB always love to state that they never pre-commit, this announcement is the boldest signal of long-term commitment to accommodative policies for a long while. In the past, unlimited liquidity had been promised for around six months. Now it is for another 14 months. Finally, on the real heart of the matter, the ECB announced that it has started consultations with other European institutions “on initiatives to promote a functioning market for asset-backed securities collateralized by loans to non-financial corporations”.

Although it remains very vague what the consultations with other European institutions could actually deliver, it is obvious that this is the step to tackle the SME lending problem. Draghi explicitly referred to the European Investment Bank (EIB) as the most important counterpart. This makes the option that the EIB guarantees SME loans, which in turn can then be used as collateral at the ECB, still the most likely outcome of these consultations. However, let’s not forget that the EIB has also access to the ECB’s liquidity facilities and might eventually buy SME-loans directly. The latter would obviously come close to a Eurozone-style quantitative easing. Draghi’s comment that “we are far from reaching any conclusions”, however, show that SMEs in peripheral countries still have to be patient before possibly receiving some relief.

In April, ECB president Draghi talked about his 360 degrees view on all possibilities. Today’s meeting confirms that the bright minds in the Eurotower are still working hard to come up with a new magic bullet. In the meantime, the only thing Draghi found in his toolkit was an old tool and a chill-pill to keep markets happy in the waiting room.