German exports drop in October

Weakening but not faltering. German exports dropped by 1.2% MoM in October, from +2.6% in September. As imports dropped by 3.4% MoM, the seasonally-adjusted trade balance actually improved to 20.7 bn euro, from 19.2 bn euro in September. In our view, the October drop in exports is a technical correction after strong September data, rather than a structural shift. Honestly, it is also very hard to attribute this drop to the Volkswagen emission scandal. Despite the negative contribution of net exports to German GDP growth in the third quarter, the export sector remains an important growth driver. Since 2009, net exports have contributed 0.1 pp to quarterly GDP growth; or one third of GDP growth every single quarter. This success story is not only the result of excellent quality and product specialization of German exporters, but also of a wide range of export destinations and recently the weak euro. In fact, a closer look at German export destinations shows that during the first nine months of the year, exports to China were down by 2.5% compared with last year’s period, showing the negative impact from the ongoing slowdown of the Chinese economy. At the same time, exports to Russia were slashed further, dropping another 28% on the back of sanctions. On the positive side, exports to the US surged by more than 20%, reflecting the direct impact of the euro weakening. Moreover, exports to the UK (+14%) and Eastern European countries (+9%) compensated for weaker demand from China. Turning to Eurozone export partners, exports benefitted from the recoveries in both Spain (+14%) and the Netherlands (+9%), while exports to France remained sluggish (+3%). As a consequence, the US has become Germany’s biggest trading partner and for the first time in years should end the year on the number one spot, ahead of France. To some extent, the ECB’s QE programme and more specifically the weak euro have been an extremely well-targeted stimulus package for German exports. It nicely amplified export growth in the US and the UK, thereby offsetting the negative impact from slowing China. Not surprisingly, Germany is amongst the biggest beneficiaries of the weaker euro, seeing its exports to non-Eurozone countries growing at a faster rate than the rest of the Eurozone; except for Ireland. While German exports to non-Eurozone countries grew by more than 9% during the first nine months of the year, the Eurozone’s export increased by 6%. All in all, German exports have become an extremely mixed bag, always up for surprises and full of diverging trends. Due to too many economic slowdowns and geopolitical conflicts around the world, exports will continue having troubles gaining more momentum in the period ahead. However, as long as the monetary policy divergence on both sides of the Atlantic continues and the ECB continues with QE, exports should remain supportive to growth.

Column: De sterren voor 2016

Zelfspot is niet de meest opvallende karaktertrek van Duitsers. Zelfs na ruim een jaar weer in Duitsland te zijn, is de humorcultuurschok voor mij nog altijd wennen. Economen moeten hier het liefst ‘Herr Professor’ heten en bloedserieuze analyses voorstellen. Bij voorkeur zwaar aangezet, zoals ‘de vluchtelingen zijn de ondergang van Duitsland’ of ‘Mario Draghi rooft het spaargeld van alle Duitsers’. Dat heeft gewicht. Alleen is het jammer dat aan het eind van elk jaar blijkt dat ook humorloze humor geen garantie biedt voor trefzekere voorspellingen. Daarom nu mijn alternatieve poging om met on-Duitse humor een blik op het volgende jaar te wagen. Te beginnen met Griekenland. Door de aanhoudende politieke chaos, de uitblijvende groei en de volledige uitverkoop van het land kantelt de sfeer onder de Griekse bevolking. De Grieken willen definitief uit de eurozone. Alexis Tsipras wint ruimschoots het nieuwe referendum over de grexit. Deze keer houdt hij zijn verkiezingsbelofte. De Duitse bondskanselier Wolfgang Schäuble, na de zelfstandigheid van Beieren en de val van Merkel de nieuwe regeringsleider van een CDU/Groenen-coalitie, feliciteert Tsipras met de woorden: ‘Sie sind geschafft.’ Als 'wederopbouw Zuid' stuurt Schäuble nog het oude bestuur van Volkswagen en het organisatiecomité van het WK voetbal 2006 naar Griekenland. Ze moeten er bekijken of de Olympische Spelen niet permanent in Griekenland kunnen plaatsvinden en of ze geen milieuvriendelijke investeringen voor de Grieken kunnen binnenhalen. Op hetzelfde moment blijkt dat elke Chinees aan vier iPhonekopieën echt genoeg heeft en dat de consumptie instort. Waardoor de wereldeconomie in een recessie belandt. Na zijn verkiezingsoverwinning kondigt de nieuwe Amerikaanse president Donald Trump onmiddellijk een ongekend stimuleringspakket voor 2017 aan. In elke Amerikaanse stad, al is die nog zo klein, worden wolkenkrabbers en casino’s gebouwd. Trump overweegt ook om wolkenkrabbers uit Londen naar de VS te verhuizen, vanwege de enorme leegstand in de Londense kantoorgebouwen na de brexit. In het Midden-Oosten begint een valutaoorlog. Nadat de prijs van olie onder 20 dollar per vat is gedaald, geven de olie-exporterende landen de koppeling van hun eigen munt aan de dollar op. ECB-president Mario Draghi reageert onmiddellijk met QE3 en QE4. Tegelijkertijd publiceert Commissie-voorzitter Jean-Claude Juncker alweer een nieuw investeringsplan. Dit keer voor een Europees ruimtevaartprogramma. Als er eindelijk leven op andere planeten wordt ontdekt, kan dat de eurozone, door de nieuwe exportmarkt, eindelijk de broodnodige duw uit de recessie geven. Zoals de lezer wel merkt, heeft de aloude Duitse dijenkletshumor mij ook al aangestoken en neemt deze column het glazenbolkijken voor 2016 niet serieus. Echt, wie heeft er eind 2014 de grootste crisissen van 2015 voorspeld? Maar zoals bij elke goede grap zit er misschien toch een druppel waarheid in… Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

ECB gifts disappoint after unwrapping

Santa Mario did not turn into the Grinch, the Christmas monster. However, his long-awaited early Christmas afternoon left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve. At its long-awaited meeting, the ECB today cut the deposit rate to -0.3%, from -0.2%, while leaving all other interest rates unchanged. In addition, the ECB decided to extend the deadline of QE purchases to at least until March 2017, from earlier September 2016, and to introduce other measures, broadening the scope of the monthly purchases. For the first time in a long while, ECB president Draghi underachieved and delivered less than the market consensus had expected. As a result, the euro appreciated and bond yields increased immediately after the policy decision. So what exactly did the ECB decide? Basically five things: i) a 10bp cut in the deposit rate; ii) an extension of the formal deadline of monthly QE purchases to at least March 2017, from earlier September 2016; iii) reinvestments of the principal payments of the securities purchased “for as long as necessary”; iv) the inclusion of regional and local government bonds in the monthly purchases; and v) an extension of fixed-rate tender procedure and full allotment for refinancing operation until the end of 2017. What the ECB did not announce was a bigger cut of the deposit rate, a cut in the refi rate or an increase of the monthly asset purchases. The discrepancy between what the ECB did and did not announce raises the question of the ECB’s ratio behind it and the arguments. Looking at the ECB’s macro assessment, it looks as if almost unchanged growth and inflation forecasts as well as a positive assessment of the impact from QE up to now laid the grounds for the ECB’s rather reserved policy reaction. In more detail, ECB staff now expects GDP growth to come in at 1.7% next year (unchanged) and 1.9% (from 1.8% in September) in 2017 and inflation to accelerate to 1% (from 1.1% in September) next year and 1.6% (from 1.7%) in 2017. The underlying story is still the same one of a gradual recovery with downside risks to growth and inflation. According to Mario Draghi, all ECB measures taken so far have increased the inflation forecasts by 0.5 percentage points for 2016 and 0.3 percentage points for 2017. They also boosted GDP by 1 percentage point over the period 2015 to 2017. Moreover, the ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought and that the ECB itself was surprised by the latest resilience of the Eurozone economy and the estimated positive impact of QE so far. Looking ahead, today’s decision still leaves all doors open for more monetary stimulus, in case the outlook for both growth and inflation were to worsen again. In the short term, however, it leaves the destiny of the euro exchange rate mainly in the hands of the Fed. For ECB watchers, today’s meeting was an important lesson not to take Draghi’s overachieving for granted. All in all, today’s ECB meeting, which was expected as an early Christmas present party, turned out to be a bit of a disappointment, maybe better matching the current Zeitgeist in the Eurozone: no copious and excessive gift party but more introvert modesty.

November Ifo beats estimates

An island of happiness after all? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, despite not so positive hard data and new uncertainties stemming from the refugee influx and latest events in Paris, German businesses remain a bunch of optimists. Germany’s most prominent leading indicator, the just released Ifo index, increased to 109.0 in November, from 108.2 in October, offsetting last month’s drop. Interestingly, both the current assessment and the expectations component increased. In fact, expectations increased to their highest level since May last year. Today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown as well as new uncertainty stemming from the Paris events. Still, the positive Ifo reading is a bit of a conundrum as it is not entirely matched by positive hard data. In our view, hard data since the start of the year showed that the German industry is actually going through rough times. Latest industrial production data suggested that the summer slump was more than only vacation-driven. In fact, the industry has underperformed since the beginning of the year, being confronted with several external headwinds. Currently, an additional headwind could be low, or better too low, oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, latest survey data send opposing signals. While latest PMI and Ifo data give rise to new optimism, the combination of inventory build-up and dropping new orders has clearly weakened the normally strong safety net for the German industry. Moreover, the facts that capacity utilization remains close to its historical average and companies do hardly see equipment as a constraint to production suggest that a self-driven investment spurt is currently not in the cards. It will take some more weeks before the final verdict can be made on which survey indicator actually is the best growth predictor. Currently, markets are not only watching German data to get insights on the German economy but also to get an idea of what the ECB can and will do at next week’s meeting. While stronger-than-expected confidence indicators could motivate some ECB members to pitch the old Prince song “When doves cry” and argue against new ECB action, Draghi’s determination at the October meeting combined with continued underlying economic weaknesses and the absence of any inflationary pressure should be decisive in launching QE2.

Confirmed: Consumers saved the German economy

German GDP growth in Q3 was confirmed at 0.3% QoQ. The second estimate of German GDP growth shows that growth in the third quarter was mainly driven by domestic factors. Private consumption and government consumption grew by 0.6% and 1.3% QoQ respectively. At the same time, domestic investments dropped by 0.3% QoQ and net exports shaved off 0.4 percentage points of growth. The fact that inventories contributed positively to GDP growth (0.2 percentage points) does not really bode well for the fourth quarter. In fact, at least in the third quarter, the German economy has finally become what many international critics had been demanding for a long while: a domestically-driven economy. Interestingly, since the third quarter of 2014, private consumption private consumption has now been on the strongest non-stop expansion since the start of the monetary union. Record high employment, increased nominal wages, low interest rates and low energy prices remain an important growth driver for the economy. Now that the year 2015 has entered home stretch, the year in review stories will again become popular. Looking in the rear-mirror, the year 2015 has been another rollercoaster ride for the economy even if most Germans hardly noticed it. However, the series of external (and sometimes even domestic) shocks the German economy was confronted with has been impressive. Just think of sanctions for Russia, Greece dancing on the edge of an euro exit, China’s slowdown, emerging market troubles, VW, refugees and now terroristic attacks. Needless to say that most – if not all – of these challenges or factors will still be in place next year. To cope with the ongoing and new challenges, the economy will need a more sustainable investment boost. Just banking on the current strength of domestic consumption could be a dangerous strategy. Moreover, a possible consumptive expansion of fiscal policies would obviously increase short-term growth prospects but would do little to substantially increase the economy’s growth potential. Particularly in a possible scenario, in which new uncertainties resulting from the terroristic attacks could further dent investment activity. In short, the second estimate of German Q3 GDP data confirmed that the worst nightmares have not come true. Consumers saved the economy and offset the industrial slump of the summer months, yielding the German economy’s fifth consecutive quarter with positive growth.

German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

Disappointing IP data doesn't bode well for Q3 GDP

More headwinds. German industrial production disappointed in September, adding to evidence that the Chinese and emerging market slowdowns are also leaving their marks on the Eurozone’s largest economy. Industrial production dropped by 1.1% MoM in September, from an upwardly revised decline of 0.6% in August. On the year, industrial production is now only up by 0.2%. Looking at the details, the weakening in industrial production was driven by almost all sectors, with an outstanding drop of 3.2% MoM in consumer goods. Even the stronghold of the industry, the construction sector, dropped by 0.9% in September. The summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy, bringing back the memories of the discussion on a possible “bazar economy”. Today’s data shows that the German industry has not been able to fully escape the negative impact of the slowdowns in China and other emerging markets. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, it does not look as if industrial production is about to accelerate any time soon. Although production expectations have increased in recent months, the reality of weaker order books and stable inventories looks somewhat less promising. For next week’s Q3 GDP release, today’s data do not bode well. Industrial production is down on the quarter, construction activity is up on the quarter, putting all hopes on net exports and private consumption. We still have to wait for Monday’s trade data but with today’s data our current estimate of 0.3% QoQ growth in Q3 all of a sudden looks rather optimistic.

Rethinking the overachiever

Mario Draghi’s bold comments have raised the bar for the December meeting to a very high level. What could the ECB actually do? Even after some sleep and several internal brainstormings, it is not fully clear to us why ECB Draghi went as far as he did with his comments during Thursday’s ECB press conference. In our view, it would have been more than sufficient to use the phrase “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”. This alone would have been a clear opener for more monetary action in December. Instead, Draghi himself brought forward the possibility of lowering the deposit rate, mentioned that some Governing Council members had already been in favour of more action at the Thursday meeting and hinted at new, unprecedented action by stating that the Governing Council had tasked internal committees to investigate further measures. All in all, a “work-and-assess” mode that has put market expectations to a (too) high level. The question of why Draghi chose for such boldness will remain unanswered. Is the ECB just overly concerned or are we back in the good old days when central banks had exclusive insight information on markets and economies? Hopefully, the meeting minutes will shed some light on these questions. Looking ahead, all eyes will now be on the 3 December meeting. In our view, despite all boldness, new action is not a done deal, yet. It will be conditional on the next batch of ECB staff projections and, particularly, the inflation forecasts for headline and core inflation in 2017 (1.7% and 1.6% respectively in the September forecasts). Admittedly, inactivity in December would clearly be counterproductive and would lead to a negative market reaction, eventually still forcing the ECB to act. In short, Draghi’s boldness has put the ECB into a position from which it will be very hard to escape without any new action. Based on Draghi’s comments on Thursday, what is the most likely action the ECB can deliver on 3 December? Given that not all members of the ECB’s Governing Council seem keen on stepping up QE, as they either deem it too early or simply ineffective (just think of Liikanen or Weidmann), returning to traditional monetary policy instruments seems like the most viable option. A cut of the deposit rate by 5-10 bp and a cut of the refi rate to zero could be easier digested by the ECB’s own QE critics. The fact that Draghi had several prepared statements at the Thursday meeting on why a rate cut would not lead to a credibility loss (despite last year’s comments that the ECB had reached the lower bound) and the focus on real not nominal rates, suggests that the ECB did already have a very intense discussion on this option. Draghi’s comments that the Governing Council had tasked all relevant committee to investigate other possible measures suggests that the ECB itself is not fully concerned that a simple “more of the same” will do the trick. Stepping up the current QE by either increasing the monthly size or the length of the programme is on the one hand hard to achieve (given that markets have already dried up significantly) and on the other hand will probably not have a huge impact on the economy. In our view, however, it is doubtful that the same committee which prepared QE last year will now all of a sudden find completely new measures no one else had ever thought about before. In theory, possible options might be purchases of corporate bonds, stocks or government bonds of non-Eurozone countries. Is it likely? In our view, not (yet). Notwithstanding the above, the ECB might still be tempted to deliver something on QE. Just in order to meet high market expectations. In this regard, some minor, rather cosmetical, changes to the current QE programme should not be excluded. An increase of the monthly size by 5 to 10bn and an extension of the minimum deadline to January 2017, instead of the current September 2016. The ECB might even consider dropping the reference to a precise minimum deadline. At first glance, this would make the programme look more open-ended than it currently is. However, at second glance, such a move could backfire in a situation in which inflation expectations start to increase before September 2016. Another more elegant way to do something more in terms of QE (probably preferred by the members of the Governing Council more critical of the programme) would be lowering the minimum yield at which the ECB can purchase bond (currently -20 bp), in line with the rate cut on the deposit facility (given the fact that it is not entirely clear whether there is an automatic link between deposit rate and the rate limit for QE purchases). That could also shift the longer end of the yield curve downwards. In the same vein, a further rate cut on TLTROs could be considered. All in all, a rate cut (also applied to the different types of unconventional monetary policy instruments), possibly combined with some cosmetic tweaking of QE look like the most likely next step for the ECB. Will it help? The ECB thinks it does. And, indeed, judging from Thursday’s market reaction, it should – at least initially – weaken the euro exchange rate. However, as it always needs two to tango, this ECB strategy would only work if the Fed would really start hiking interest rates. In this regard, any market and ECB enthusiasm could easily end with a hangover two weeks later when the Fed meets on 16 December.

German Ifo drops in October

Surprised but not frightened? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, the reaction can be summarized as impressed but not frightened. Germany’s most prominent leading indicator, the just released Ifo index dropped to 108.2 in October, from 108.5 in September. The first drop since June this year. Interestingly, the drop was exclusively driven by a weaker assessment of the current situation. The expectation component, on the other side, increased to 103.8, from 103.3, continuing its recent positive trend and actually reaching the highest level since June last year. Of course, one should not interpret too much in a single confidence indicator but today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown. Despite these external uncertainties and regular concerns about the real strength of the German economy, German business remain highly optimistic. There are two possible explanations for this trend: either German businesses are naive optimists or ice-cold realists, sticking to the facts. In our view, there are many arguments in favour of the latter. Admittedly, the latest drop in new orders and shrining order books has dented some optimism on the outlook for the German industry. However, continued growth in the service sector, strong domestic demand and an outside world that might be slowing but is definitely not falling off a cliff, should keep the German economy on the sunny side. Finally, let’s not forget that the German economy is one of the largest beneficiaries of the ECB QE programme, taking immediate support from a weak euro and low interest rates. Needless to say, not all is well in the land of cars. The lack of new structural reforms, the unfinished energy reform and too few domestic investments will eventually hit the economy. Moreover, the inflow of refugees, while being short-term stimulus for domestic demand, is the biggest challenge for Germany in decades, posing both enormous risks and opportunities, but in anyway asking for unprecedented and lasting flexibility of both the society and the economy. All in all, today’s Ifo index shows that the German economy is not totally immune against external slowdowns and internal scandals. However, there is no reason at all to fear an abrupt slowdown of the Eurozone’s biggest economy

Draghi increases bets for December action

Back to back with one of Malta’s biggest casinos, the ECB today clearly increased its bets, sending strong hints on new monetary stimulus at the December meeting. While no decision was taken today, the ECB’s sounded more concerned about the growth outlook for the Eurozone and signaled its willingness to act. According to ECB president Draghi, some members of the Governing Council were already willing to act today. As regards the macro-economic assessment, the ECB voiced more concerns about the growth outlook. Back in September, market turmoil and the slowdown of China and emerging markets were still too fresh to be integrated in the ECB’s projections. Today, the ECB singled exactly these factors out as the main risk for the Eurozone economy. To be precise, the ECB warned that “concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.” Against the background of increased concerns about growth, and related second-round effects on inflation, ECB president Draghi opened the door to more monetary stimulus in December. In this regards, the key statements at today’s press conference were “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and that the ECB already today had a “rich discussion and was “open to a whole menu of monetary policy instruments”. Draghi remarked that the ECB had tasked several committees to work on the implementation of possible instruments. He called this a “work-and-assess” stance. Finally, Draghi also mentioned a lowering of the deposit rate as a possibility for future action, even though back in 2014 he had announced that interest rates had reached the lower bound. Obviously, it is hard not to see the ECB’s intention to add more monetary stimulus. Still, the ruthlessness with which Draghi sometimes tried to defend the ECB’s position was a bit surprising. In fact, the ECB is still only one third into its envisaged QE purchases and the discussion on whether low (or even negative) inflation rates are now a curse or a gift for the Eurozone remains unclear. Furthermore, it is also far from certain that the marginal gains from stepping up QE are still positive. Judging from the immediate market reaction, stepping up QE should at least weaken the euro somewhat. In our view, probably the biggest and most important goal of the ECB as it would deliver almost instant success. Even though Draghi repeated the ECB’s well-known position that the exchange rate was obviously not a policy target for the ECB. All in all, Draghi has been more explicit than we had expected. The door for more monetary stimulus is wide open and does not necessarily have to be more QE. It could also be a lower deposit rate, maybe even fx interventions or purchases of other assets (previously excluded). Draghi’s u-turn on the lower bound of interest rates has made him walk in the footsteps of former German chancellor Adenauer who once said “why should I care about my chatter from yesterday”. So everything is possible. In our view, the main triggers for more action in December will be the ECB’s staff projections, particularly the headline and core inflation forecasts for 2017. Even though market participants should know from recent experiences with the Fed that crucial and groundbreaking decisions can be postponed more often than markets believe, it will be hard for the ECB not to deliver in December. Maybe inspired by the casino next door, the ECB today increased its bets. The ECB has to have strong cards, because it will have to show its hand in December.

European Commission presents proposals for further reforms of EMU

At least they are trying. Today, the European Commission presented its plans on how to get the monetary union on a more sustainable footing. The Commission released a so-called policy package, trying to bring parts of the “Five Presidents’ Report” into life. To be clear, the Commission aims at implementation by mid-2017. Afterwards, stage 2 should start, which according to the Commission would include “more far-reaching measures”, which will “inevitably involve sharing more sovereignty and solidarity”. Even though the Commission states that its proposals are the result of extensive consultations with Eurozone member states, the European Parliament and stakeholders (whoever this might be), past experience has shown that these proposals are likely to be watered down in the coming months. Looking at the details, the Commission has tried to address all relevant issues, which would make the monetary union more sustainable: increase competitiveness, more supervision of national fiscal policies, a fully-fledged banking union and a common Eurozone voice in international for a. The concrete proposals, however, suggest that the courage to really make a huge step ahead was missing (or probably better said: the room was simply not given by national governments). Concrete, the Commission proposes national Competitiveness Boards, a European Fiscal Board, a more streamlined process for setting up national budgets combined with European supervision, the full implementation of the Bank Recovery and Resolution Directive and the directive on Deposit-guarantee schemes and, last but not least, a common representation of the Eurozone at the IMF. From a negative angle, the Commission proposals are mainly of a cosmetical nature and have a high “old wine in new skins” portion. Only the common representation is new and groundbreaking. Setting up new boards or committees could be regarded as window-dressing and it is doubtful that this really leads to stricter implementation of necessary reforms. The intentions are good but who does still remember the fiscal compact or national debt-brakes? From a positive angle and to give the Commission some credit, however, they at least tried. The Commission’s proposals are a very gentle, probably too gentle, push towards more political union. It is probably already the smallest common denominator across national governments. Let’s face it, the appetite for quantum leaps towards a political union is currently simply not strong enough.

German IP disappoints in August

“I know what you did last summer…”. German industrial production disappointed in August, dropping by 1.2% MoM, from +1.2% MoM in July. On the year, industrial production is still up by 2.3%. The drop was widely spread across all sectors. Only the production of intermediate goods remained flat. The sharpest declines were recorded in the production of capital goods and energy. The German industry is still struggling to gain momentum. Yesterday’s drop in new orders already signaled a note of caution. The August drop marked the first decline for two consecutive months since the beginning of the year. A clear sign for caution. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy. All in all, today’s weak industrial production data will again give rise to speculation that the German economy is suffering from the Chinese slowdown. In our view, however, there is no need to panic. Just remember last summer when the German industry went through a similar period of weak data. In the end, the batch of disappointing data was rather the result of too many Germans enjoying too much vacation than the beginning of a downward trend. Let’s hope that history repeats itself.

German labour market remains strong

Good news with a bit of blush. German unemployment dropped by a non-seasonally adjusted 87,600 in September, bringing the total number of unemployed down to 2.708 million. In seasonally-adjusted terms, unemployment increased by 2,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.4%. The late-summer revival of the German labour market turned out to be softer than normal. In fact, today’s September numbers are the worst September performance of the German labour market since 2002. However, in our view, this is probably the effect of the summer vacation ending in September in more regional states than normally and not a sign of a structural weakening of the labour market. Interestingly, latest numbers show that the success story of the German labour market does not only hold for a couple of lucky ones but is actually spreading across the entire market. Last year, the number of people working in so-called “normal” employment conditions, ie mainly full-time working hours, increased by more than 450 000 jobs. In the same period, the number of low-wage jobs came down. A clear indication that despite constant headline numbers, the German labour market is still evolving positively. Looking ahead, and despite the uncertainty stemming from the Volkswagen crisis, the prospects for the German labour market remain bright. The number of vacancies is still increasing and employers, particularly in the service sector, have again stepped up their recruitment plans. According to a recent study, the often-discussed lack of qualified workers mainly occurs in the engineering, the metal and electronic industry. Obviously, these numbers will add comfort to the currently widely heard equation that an economy with a strong labour market, combined with high vacancies, the lack of qualified workers and the demographic change, can digest a high inflow of migrants. However, whether this equation is simple or only simplistic remains to be seen. Language skills, recognition of diploma, financial support and integration in society are just some issues that will determine whether Germany can really make it. In our view, one thing is for sure, a successful integration of the current migration inflows requires an unprecedented and long-lasting flexibility of the German economy and society. All in all, the German labour market will remain an important growth driver this year and beyond. The challenges ahead, however, are much bigger than the relatively dull and constant data from today’s report suggest.

Germany - Chased by cars?

Tomorrow’s Ifo index should get less attention than normal. The latest events in the automotive industry overshadow ordinary confidence indicators and could eventually leave their marks on the German economy. Normally, the release of the Ifo index is always a special day for markets and observers of both the German and the Eurozone economy. It remains the first and most prominent leading indicator. Tomorrow’s release, no matter what the outcome will be, is already outdated before the numbers have actually been released. As so often in recent months with German confidence indicators, the Ifo comes between at least two drastic events and therefore is unable to capture the impact of any of the events. In normal circumstances, tomorrow’s Ifo index should give a better understanding of the possible impact of the late-summer market turmoil and the Chinese slowing on the German economy. The ongoing refugee crisis and now Volkswagen shocker, however, pose new risks to the German economy, which tomorrow’s Ifo will not yet capture. As regards to the refugee crisis, it is clearly too early to assess the possible impact. Besides the evident direct costs of building refugee shelters and housing and offering financial support, all other effects on, for example, the labour market, are still too unclear to be put in numbers. Obviously, the simple equation that an ageing economy with a shrinking labour force needs more immigration is appealing. However, only time will tell as to whether the German society can show enough and, even more important, sustainable flexibility to support long-term integration. As regards to Volkswagen, a short-term reaction of the German economy is more likely, even if at the current juncture it still is unclear what the impact from recent allegations will really be. Needless to say, owning 12 brands in seven European countries and having a global market share of around 13% of all passenger cars, there will be an impact. Volkswagen is one of Germany’s most important global champions. It is an important growth driver for the German economy. In Germany, Volkswagen employs more than 270,000 people and according to media reports is the third largest employer in the EU. Returning to Germany and adding a proxy of the possible suppliers to the equation, Volkswagen accounts for roughly 1.5% of German employment and even more when it comes to the growth impact. At this point, it is unclear what the impact of the probe into VW’s diesel manipulations will be. Volkswagen set aside more than €6bn as risk provisions. Estimates of a possible fine from US regulators for Volkswagen currently range from €1bn to €16bn. Moreover, the company will clearly have costs in changing the cars, with latest reports referring to 11 million cars affected by the diesel manipulations. As a reminder, Volkswagen produces around 10 million new cars each year. The reputational damage is currently impossible to assess. While the German economy defied Greece, the euro crisis and the Chinese slowdown, it could now be facing the biggest downside risk in a long while. The irony of all of this is that the threat could now come from the inside, rather than from the outside.

Column: Over Merkel, emoties en Waterloo

Angela Merkel is alom bekend als politieke overlevingskunstenaar. Haar doormodderen en strategisch overnemen van standpunten van de tegenstander is haar op verwijten van visieloosheid en draaikonten komen te staan. Niet de wens het klimaat te redden, maar wel de (bijna) kernsmelting in Fukushima en het aangewakkerde anti-nucleaire sentiment deden de bondskanselier plots van standpunt veranderen. Met deze geniale draai veegde zij in een keer het partijprogramma van de Groenen van tafel en maakte zij van Duitsland een voortrekkersland in energie. Duitsland sinds jaar en dag vrijwel het laatste land zonder wettelijk minimumloon? Merkel maakt er haar speerpunt van en haalt de socialisten links in. Over Merkels draaikonterij in de eurocrisis, van géén hulp tot een derde pakket voor Griekenland, is inmiddels ook al alles gezegd. Merkel is de Houdini van de Europese regeringsleiders, een boeienkoningin, die zich uit elke val weet te bevrijden. Zij is een meester in het aanvoelen van de publieke opinie, terwijl zij zelf nooit op emotie is betrapt. De vluchtelingencrisis heeft dit veranderd. De Duitsers laten nu een groot hart zien. Vluchtelingen worden ruimschoots opgenomen, juichend met dekens en knuffels ontvangen op treinstations en de bereidheid hen te helpen is groot. Tienduizenden vluchtelingen lopen op de snelweg in Hongarije, ‘Germany, Germany’ en ‘Merkel’ roepend. Kan Duitsland die toeloop aan? ‘Wir schaffen das’ (dat krijgen we voor elkaar), beweerde de bondskanselier stellig. Dat was een week geleden. Nu zijn de grenzen dicht, zijn de opvangkampen, sporthallen, stations en lege scholen overvol en luidt elke deelstaat de noodklok. En de opvangbereidheid in de andere EU-lidstaten laat te wensen over. De vluchteling-stroom en de hoop op een betere toekomst in ‘Germany’ zijn alleen maar groter geworden. Heeft de best geïnformeerde vrouw van het westelijk halfrond werkelijk niet voorzien dat de genereuze opname van de vluchtelingenstroom de poorten alleen maar verder zou openzetten en dat de voorzieningen in een week uitgeput zouden zijn? Dat er zicht is op een bevolkingsaanwas van 12,5 procent in één jaar? Licht hierop werpt nu - na sluiting van de grenzen en de vraag of Duitsland zich niet moet verontschuldigen vanwege de gastvrije ontvangst van de vluchtelingen - haar uitspraak ‘Dann ist das nicht mein Land’. Merkel toont emoties. De ironie van de geschiedenis is dat net nu Merkel eindelijk emoties laat zien, dit haar einde kan inluiden. Want Duitsers zijn vriendelijk en zullen helpen bij humanitaire nood, maar ook Duitsers willen niet naast een vluchtelingenopvanghuis wonen en sturen hun kinderen naar een witte school. De grenzen kraken en de publieke opinie en de eenheid binnen de christendemocraten vertonen al de eerste barsten. Elke leider vindt vroeg of laat zijn Waterloo. En wat is er mooier voor een christendemocrate dan ten onder te gaan aan barmhartigheid? Deae column verscheen vandaag in het Belgische dagblad "De Tijd"

German exports surge in July

The reliable friend. July trade data just showed that the export sector remains an important growth driver of the German economy and has added to evidence of a solid start to the third quarter. Exports increased by 2.4% MoM, from -1.1% in June. As imports increased by 2.2% MoM, the seasonally-adjusted trade balance improved to 22.8 bn euro, from 22.1 in June. While many German commentators still complain about the ECB’s QE programme, German exporters should send a thank-you letter to Mario Draghi. Notwithstanding the excellent quality and product specialization of German exporters, the weak euro has clearly been a very special stimulus package; actually for the entire German economy. While industrial production is still struggling to gain momentum, exports have increased by more than 17% since the start of the year. In the same period, the effective nominal exchange rate of the euro has depreciated by around 4%. A closer look at German exports shows that exports to some countries are more sensitive to exchange rate movements than others. Interestingly, German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, German exports to the US seem to be most sensitive exchange rate changes. An important driver behind the fact that in the first half of the year, the US has become the single most important German trading partner; taking over this number one position from France. As regards the other currently often discussed German trading partners, a comparison of export and exchange rate developments shows that exports to both China and other emerging markets are less correlated. Looking ahead, this link between exports to different destinations and exchange rate movements is both good and bad news for the German economy. It shows that a weak exchange rate might compensate for domestically-driven problems in emerging economies, while at the same time it should further boost exports to the US. All in all, the weaker euro seems to have off-set domestically-driven weaker demand in several emerging economies. If and when the Fed finally starts hiking interest rates and the anticipated further weakening of the euro actually materializes, German exporters should not only send a thank-you letter to Mario Draghi but also to Janet Yellen.

Draghi gives dovish present on his birthday

What a difference only a couple of months can make. Remember that back in March and April, the ECB was very upbeat on the Eurozone economy, with ECB president Draghi obviously enjoying the positive impact from QE (and even its pure announcement effect)? Now, just a couple of months later, the ECB has become less upbeat. After today’s ECB meeting, president Draghi sounded rather dovish, keeping the door for stepping up QE open. The somewhat more downbeat economic assessment is mainly the result of weaker growth in emerging markets. The ECB still expects a gradual recovery, albeit at a somewhat weaker pace. This was also reflected in the latest ECB staff projection, which foresee GDP growth to come in at 1.4% this year (from 1.5% in the June projections), 1.7% in 2016 (from 1.9%) and 1.8% in 2017 (from 2.0%). As regards inflation, ECB staff projections were revised downwards significantly on the back of lower energy prices. In the latest projections, ECB staff expects inflation to come in at 0.1% this year (from 0.3%), 1.1% in 2016 (from 1.5%) and 1.7% (from 1.8%). All these projections, however, have to be taken with a large pinch of salt as the cut-off date was much earlier than usual and therefore before the peak of latest market turmoil. Normally, the cut-off date of ECB staff projections is around the 20th of the month, now it was the 12th. The early cut-off date is an additional explanation for the ECB’s caution and new emphasis on downside risks. As regards the ongoing QE programme, the ECB announced that it would increase the so-called “share issue limit” from initially 25% to 33%. This decision was taken after a first assessment of the first six months of QE and means that the ECB could now purchase up 33% of each government bond issuance (as long as this would not give the ECB a blocking minority). While some market participants saw this measure as a first step towards stepping up QE, it is in our view a more technical measure, reflecting the fact and fear that the ECB could run into troubles achieving its monthly target of 60bn euro. Needless to say that the drop in inflation projections has revived the deflation versus disinflation debate within the ECB. It is the same debate the ECB had at the end of last year when discussing the need for QE. It is the debate on whether low or negative headline inflation rates, mainly triggered by dropping energy prices, do lead to deflationary expectations or are simply a blessing for the economy, increasing consumers’ purchasing power. In today’s comments, Draghi suggested that currently the ECB was still tending to the “it’s a blessing” explanation. Still, Draghi made two important comments which in our view set the door for more QE a bit more open: the small addition of “or beyond” to the targeted duration of September 2016 for the QE programme and the phrase that the Governing Council emphasized its “willingness and ability to act, if warranted, by using all the instruments available within its mandate and, in particular, recalls that the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme.” The door to more QE is open, even if Draghi also stressed that the ECB today had not discussed this possibility, but will the ECB also walk through this door? To answer this question, one has to go back to the initial QE discussion in late 2014. In our view, back then the deflation threat was a welcome stalking-horse to convince even die-hard monetarists in the Governing Council to sign off QE. Of course, successful QE would eventually also increase inflation and inflationary expectations but only indirectly and as a second round effect. The main and most imminent impact from a successful QE would go through a weaker exchange rate and stronger economic growth. Keeping this in mind, lower inflation projections will not per se lead to an increase of QE. To really see the ECB stepping up QE, the Eurozone recovery would need to falter first. On his birthday, Mario Draghi did not receive but actually gave a present to financial markets, stressing the ECB’s determination to do everything to support the Eurozone economy.

German inflation in August signals new headache for ECB

Based on the results of six regional states, German headline inflation remained unchanged at 0.2% YoY in August. On the month, German price development was flat. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation remained unchanged and stands now at 0.1% YoY. A quick look at the available components at the regional levels shows that low headline inflation is not only the result of lower energy prices but also some tentative second-round effects on consumer goods. At the same time, higher prices in the service sector indicate that there is clearly no risk of deflation for the German economy. Interestingly, the weakening of the euro exchange rate is still not visible in significantly higher import prices. To the contrary, import prices continue to fall, with latest data showing a 0.7% YoY drop in August. Looking ahead, the latest plunge in commodity prices should leave its marks on headline inflation in the coming months. Even a drop into negative territory cannot be excluded. Against this background, reaching the official Bundesbank projection of 0.5% annual inflation for the entire year 2015 has become highly unlikely. It would actually require headline inflation to average 0.9% in the remaining months of the year. In our view, headline inflation should stay close to but above zero for the post-summer months before gradually increasing towards 1% YoY. Consequently, these low inflation rates should continue supporting private consumption. While low inflation or even negative inflation rates are a blessing for German consumers, they could become a new headache for the ECB. As at the end of last year when the discussion about a possible QE started, the ECB is again confronted with deflationary forces. Or to be more precise, with disinflationary forces. With commodity prices now significantly lower than back at the end of 2014, the ECB will have to decide whether low or negative inflation rates are rather positive (ie strengthening purchasing power and domestic demand) or negative (ie contributing to dropping inflation expectations). This discussion should be sharpened by the latest round of ECB staff projections, which in our view should show a significant downward revision of the ECB’s inflation forecasts. The last edition of the ECB projections back in June included the technical assumption of an average oil price of 64 USD/b this year, 71 USD/b next year and 73.1 USD/b in 2017 (based on future contracts). Even if the cut-off date of the latest projection round was probably slightly before the peak of recent market turmoil, these oil price assumptions do now look very outdated. Just doing some quick back-of-the-envelope calculations suggests that the new commodity environment could lead to downward revision of the ECB’s inflation projections of between 0.4 and 0.6 percentage points for 2016 and 2017. In June, the ECB projected inflation at 1.5% in 2016 and 1.8% in 2017. Admittedly, the ECB projections are much more complex and sophisticated than our back-of-the-envelope calculations. However, anything else than a clear downward revision of the ECB’s inflation numbers next week would be a surprise. All in all, the latest plunge in commodity prices will clearly revive the good vs bad deflation debate in the EuroTower. For the time being, this should not yet lead to new policy action. However, recent comments by ECB chief economist Peter Praet confirm our view that latest market developments have rather increased than decreased chances for more QE.

German Ifo defies market and China woes

Just a transitional snapshot or a sign of absolute matter-of-factness? German companies remain unimpressed by the current series of uncertainties and turmoil. Neither the Greek crisis nor the new Chinese uncertainties and stock market turbulences have been able to dent German business’ optimism. Germany’s most prominent leading indicator, the just released Ifo index, increased to 108.3 in August, from 108.0 in July. While the current assessment component increased to its highest level since April 2014, the expectation component dropped marginally to 102.2, from 102.3 in July. There are two possible explanations for today’s surprise increase. Either the ongoing stock market turbulences came simply too late to have an impact on the Ifo survey and will therefore only unfold their full negative impact next month, or German businesses are a bunch of ice-cold realists, sticking to the pure facts. In our view, there are many arguments in favour of the latter. And, indeed, the pure facts clearly argue against panic. First of all, as illustrated by this morning’s second estimate of 2Q GDP data, the German economic model has become much more balanced than critics have been complaining about. GDP growth was confirmed at 0.4% QoQ, mainly driven by both net exports and consumption. At the same time, inventories and investment turned out to be a drag on growth. The bigger picture shows that over the last quarters, private consumption has been a stronger growth driver than net exports. While net exports contributed less than 0.2 percentage points to quarterly GDP growth rates, private consumption accounted for 0.3 percentage points. The renewed drop in energy prices should clearly support domestic demand in the months ahead. Secondly, a slowdown of the Chinese economy is not the same as a recession. After years of strong growth, it is somewhat normal that growth rates are coming down. Let’s not forget that at the current growth rate, the Chinese economy would still add the size of the Swiss economy every year. Thirdly, German exports to China have already slowed down in the first half of the year, without derailing the German recovery. The geographical diversification of German exporters should cushion any further weakening of Chinese demand. China currently accounts for less than 6% of total German exports. As long as other major export markets like the US, the UK, Eastern Europe and the Eurozone are continuing to grow or at least avoid a new slowdown, German exports should remain solid. Fourthly, the devaluation of the Chinese renminbi alone should not automatically crowd out German products. To the contrary, over the last five years, German exports to China had recorded growth rates of between 20% and 60%, with an exchange rate much stronger than currently. Last but not least, latest stock market turbulences, Chinese uncertainties and a marginally strengthening of the euro exchange rate have gone hand in hand with a sharp drop in commodity prices. This drop in commodity and energy prices is in our view the final argument against any panic as it should support domestic demand. All in all, it is obviously too early to give the final verdict on the economic fallout of the latest market turmoil and Chinese uncertainties. German businesses, however, are taking a rather benign stance, putting their money on the fundamental strengths of the German economy.

Eurozone: Behind the scenes of Germany's "yes"

Today’s vote in the German parliament will no doubt bring a “yes” for the third Greek bailout package. While the outcome of the vote might not be spectacular, the details are clearly explosive. Greece and the ongoing negotiations have been the dominant topics for German politicians and common people over the entire summer. With today’s vote in the Bundestag, the German parliament could end these discussions; at least for the time being. To be precise: 631 German MPs have returned from their summer vacation to vote on the third bailout package for Greece. Chancellor Merkel’s government holds 504 seats and, moreover, at least one opposition party – the Greens (holding 63 seats) – already announced it would also vote in favour of a third Greek package. Consequently, anything else than an overwhelming “yes” vote would be a surprise. Nevertheless, today’s vote will be a test for Angela Merkel’s leadership. While opposition from other German parties against the new Greek bailout package has been rather muted, it is Merkel’s own party – the conservative CDU – which is still struggling with support for Greece. When the German parliament voted on the start of the official negotiations with the Tsipras government, 60 members of Merkel’s party voted against. In recent days, the “no” voters have received increasing media attention in Germany. According to reports, Merkel’s chief whip, Volker Kauder, had threatened possible dissidents that they would face consequences, like losing posts and positions in the party, in case they do not stick to the official party line. Against this background, all eyes will be on the exact number of “no” votes from Merkel’s own party today. A number higher than the earlier 60 would not immediately be a problem for Merkel. There simply is no crown prince or princess in her own party, neither are there any signs of a palace revolution. However, in the longer run, a growing number of dissident votes would clearly weaken Merkel’s position in the government and might eventually even reduce her appetite to run for a fourth term in office in the 2017 elections. On a more substantial point, the German government will continue having a hard time, even after today’s vote. It’s the role of the IMF in the third Greek bailout package. German politicians have frequently said that there would be no new package for Greece without IMF participation. At the same time, however, IMF participation would mean debt relief or even debt forgiveness for Greece. At least the latter is something, the same German politicians have been strongly opposing for a long while. How the German government wants to square this circle is still unclear. In our view and judging from last Friday’s Eurogroup statement, a face-saving compromise could be that initially IMF participation would be limited to technical assistance, monitoring and surveillance of the Greek reforms. Later, probably in October after a first successful assessment of the Greek measures and their implementation, the Eurogroup could decide on debt relief measures and then bring the IMF on board with additional financial assistance. Such a scenario seems to be backed by Friday’s Eurogroup statement which said that “in line with the Euro summit statement of 12 July, the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and repayment periods) aiming at ensuring that Greece's gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures agreed in the ESM programme and will be considered after the first positive completion of a programme review.” All in all, today’s vote might not be as interesting as another episode of “House of Cards” but it has at least the potential to provide some explosives, even Francis Underwood would pay attention to.

German growth - strong without being impressive

Neither Greece nor China were able to stop the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.4% QoQ in the second quarter, from 0.3% QoQ in 1Q. Compared with the second quarter of 2014, German GDP increased by 1.6%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was driven by exports and domestic consumption. Investment was a drag on growth. The Eurozone powerhouse has successfully defied external turbulences. Despite the Greek crisis, the Chinese stock market collapse and growth slowdown fears as well as continued weakness in many Eurozone countries, the German economy continued its latest stretch of four consecutive quarters with growth averaging 0.4%. Since the last technical recession in 2012, the economy has grown by an average of 0.3% each quarter. And there is more. Exports have returned as an important growth driver, showing that Germany indeed is one of the main beneficiaries of the weaker euro. Nevertheless, not all that glitters is gold. The fact that record low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth. Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case. Looking ahead, mixed monthly data have made it difficult to get a good grip on Germany’s growth outlook. While industrial production disappointed in June, new orders were encouraging and soft indicators – despite some recent weakening – remained strong. Record high employment, low inflation and decent wage growth remain strong trumps for the domestic economy and bode well for the second half of the year. However, at the same time, it is not difficult to envision a cyclical cooling of Germany’s export-driven engine. The key buyer of German capital goods, China, is in the midst of a slowdown, while Germany’s service sector and domestic consumption – despite recent positive developments – are currently still not able to fully offset a possible strong hit to exports. After the rebalancing discussion as part of the euro crisis debate, China’s slowdown will now provide new arguments in favour of more domestic investment in Germany. Finally, although highly positive in the context of the euro crisis, the latest improvement in Eurozone periphery countries will not be able to compensate for the continued stagnation of the French economy and its direct impact for German exports. All in all, the first estimate of German Q2 growth just confirmed that the Eurozone’s economic powerhouse is cruising along nicely, despite several external turbulences. While the Eurozone economy seems to see some signs of rebalancing with the stagnation in France and strong growth numbers from Spain and Greece, Germany remains an almost boring beacon of reliability. Carsten Brzeski

German Ifo defies Greek woes

Forget about Greece. This is at least how German businesses seem to look at Greek turbulences of the last weeks, judging from the latest Ifo numbers. Germany’s most prominent leading indicator just increased to 108.0, from 107.4 in June. Both the current assessment and the expectations component increased, with the current assessment component almost returning to its May level. In the eyes of German businesses, the external tailwinds, stemming from low energy prices and a weak euro, clearly outweigh any downside risk from the Greek crisis on the German economy. Even if the doses has been reduced somewhat, the German economy is still on steroids. Despite some recent rebounds, the weak euro exchange rate and low energy prices are still artificially extending the last phase of a very positive reform-growth cycle. Even after today’s drop, the level of the Ifo remains comfortably high. In fact, comparing the levels of the second quarter with the levels of the first quarter suggests a growth acceleration of the German economy in Q2, confirming our positive growth outlook. Looking beyond the second quarter, the German economy currently faces three major risks: : i) the never-ending Greek crisis, which despite latest positive developments is still far from being solved and could re-escalate quickly almost any time; ii) a longer-than-expected periods of weakness of the US and the Chinese economy (both accounting for 15% of total German trade); and iii) the lack of new reforms to further reduce unemployment and tackle the current investment gap combined with the deficit in digitalization could eventually backfire on the German economy once the current favourable tailwinds disappear. While there is little German policymakers can do to tackle the first two risks, developments in domestic sectors can be influenced. A closer look at the German industry shows that the industrial safety net has become somewhat thinner over the last months. Orders at hand have slightly come down and inventories have remained relatively stable at moderate levels for more than half a year now. This suggests that not too much production acceleration is currently in the German industry’s pipelines. Interestingly, capacity utilisation in the German manufacturing sector is still lower than in 2011 and 2012. Even though financing conditions in Germany remain extremely favourable, average capacity utilisation rates, modestly filled order books and continued uncertainty in main export destinations all argue against an imminent investment boom. In fact, financing conditions are currently so favourable that they might even trigger “economically useless” investments. In our view, the only way out of this dilemma would be government-induced or supported investments in typical public goods, eg infrastructure, energy and education. Last month, Grexit fears were discussion topic number one on German streets, pubs and even boardrooms. With latest developments in the Greek crisis and the agreement to reach a deal, discussions in local pubs can focus again on the upcoming soccer season and, as today’s Ifo index suggests, companies want to return to business as usual.

Helers of kwakzalvers?

In de top 100 van de beste economiefaculteiten ter wereld staan maar twee Duitse. Zijn de Duitsers niet goed in de economische leer? De Griekse saga toont dat dit soort rangschikkingen leuk artikelmateriaal vormt, maar dat de werkelijkheid anders is. Het Duitse economische beleid heeft uiteindelijk gezegevierd, ook zonder internationale academische waardering. Griekenland zal daar weinig vruchten van plukken. Als Tsipras echt iets in Europa wil veranderen, kan hij Angela Merkel en Wolfgang Schäuble beter op een zomercursus economie naar Londen of Milaan sturen. Dat is beter dan ministers van Financiën middelvingers op te laten steken of vuil spuiend in de media te verschijnen. Een blik op het akkoord met Griekenland laat de hand zien van de Duitse economische leer: het ordoliberalisme (of in het Duits: Ordnungspolitik). Deze leer staat voor structurele hervormingen als de enige weg naar geluk en economische groei. Helaas betekent het ordoliberalisme na jaren van recessie, massawerkloosheid en politieke instabiliteit in Griekenland ook nieuwe en langdurige problemen. De Duitse school ziet dat anders. De argumentatie is dat Tsipras door zijn stoere politiek het prille herstel van vorig jaar kapot heeft gemaakt. Dat is een denkfout. De groei van vorig jaar was niet het gevolg van succesvolle hervormingen, maar van kunstmatige groei. Het was het gevolg van Europees geld, dat altijd aan het einde van de Europese financieringsperiode (de laatste was van 2007 tot 2013) wordt uitbetaald. Dat gaf Griekenland een groei-effect van zo’n 2 procent van het bruto binnenlands product (bbp). De kunstmatige groei van afgelopen jaar maskeert een veel dramatischer beeld in Griekenland: de uitverkoop van het land, of voor economen, het sterke verval van de zogenaamde kapitaalstock. Kapitaalstock is de actuele waarde van alle productiecapaciteit van de Griekse economie. Die waarde is sinds 2010 met zo’n 8 procent gedaald. Zo’n afbraak van de productiecapaciteit zie je doorgaans alleen tijdens oorlogen of lange economische depressies. Interessant is dat van alle andere Europese probleemlanden alleen Portugal te maken heeft met een afbouw van productiecapaciteit (in mindere mate dan Griekenland). In Ierland en Spanje neemt de kapitaalstock weer toe. Het huidige akkoord met Griekenland is voor deze investeringsproblematiek erg dun. Europa en de Duitse school hopen nog steeds op de louterende kracht van hervormingen. Het geld uit het zogenaamde Juncker-plan bestaat uit al ingeplande EU-middelen, die met veel vertraging het land zullen bereiken. De 12,5 miljard euro die ooit uit een privatiseringsfonds van 50 miljard zal rollen is wishful thinking. Structurele hervormingen zijn absoluut nodig in Griekenland, maar de opbouw van de productiecapaciteit - lees inkomen en daarmee de belastingen - nog meer. Om politieke stabiliteit te krijgen en het Griekse volk én de niet-Grieken aan de kant van Europa te houden, zal de Duitse economische school zich verder moeten verdiepen. Wellicht stijgen de Duitse universiteiten dan ook in de rankings? Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

Eurozone - Return to calm but not normality

The payment of ECB and IMF obligations seems to be topping the institutions’ scale of priorities. The disbursement of the €7.16bn EFSM bridge loan, approved last Friday, has allowed Greece to meet its compelling short-term obligations. Yesterday, the Greek government disposed both the reimbursement of the €3.7bn bond held by the ECB and the payment of around €2bn to the IMF. As confirmed by IMF spokesman Gerry Rice, Greece is no longer in arrears to the IMF. In another step in the search of normality, Greek banks were allowed (upon the positive advice of the Bank of Greece and the ECB) to re-open yesterday. While many of the capital controls will remain in place, partial functionality should nonetheless help customers. They can now cumulate the €60 daily withdrawals into a single weekly withdrawal and have re-gained access to their bank deposit boxes. With cash holdings in boxes reportedly amounting at around €10bn, this could be another handy source of short-term personal liquidity. The government reshuffle put in place by Tsipras over the weekend was not a game changer. Sure, it proved that in principle the party leadership is keen to re-build reciprocal confidence with lenders and that is unwilling to accept ambiguity when working for a third package. However, for the time being, the destiny of the 39 rebels (who voted against the bill or abstained) has not been decided yet. Tomorrow, the Greek Parliament will vote on the second set of prior actions agreed with lenders: these will include a new code of civil procedure and the adoption of the EU’s Bank Recovery and Resolution Directive (BRRD). In view of the vote, it seems reasonable to expect a replication of the voting pattern shown last week. While the passage of the bill does not seem at risk, the outcome of the vote deserves attention, as any further haemorrhage of support from Syriza’s MPs could in principle weaken Tsipras’ position, pushing him to seek snap elections in the autumn. A positive passage of the second bill should in principle pave the way to the quick start of actual negotiations. With representatives of Greece’s creditors (the former Troika) and of the ESM reportedly already in Athens, pressure for a rapid agreement on the memorandum of understanding of a third programme is already mounting. Yesterday, the president of the EU Commission, Juncker, and of the Eurogroup, Dijsselbloem, said that the Greek parliament must complete the bailout agreement with the ESM within two weeks, as this would allow the disbursement of funds in time for Greece to meet its August financial obligations (another ECB held bond matures on 20 August). At the same time, German politicians are still licking their wounds after last week’s agreement to reach a deal. It still does not feel good. According to media reports, there had been different views on Greece and a possible Grexit between Chancellor Merkel and Finance Minister Schäuble. While Schäuble is still flirting with the idea of a Grexit and even hinted at the possibility of his own resignation, Merkel remarked during a television interview that the Grexit discussions should be stopped. The negotiations had started. Some calm has returned to Greece. After last week’s turbulences, yesterday marked the first day of Greece in a new environment. An environment, in which banks are a bit more open but not really open, taxes are higher and Greece has fulfilled short-term payment obligations but is still struggling to find a third bailout. Clearly not a return to normality.

Eurozone - Leap of faith

As expected, today’s ECB meeting was all about Greece. ECB president Draghi did not only answer many questions, he also delivered tangibles for Greece: a minor increase of ELA for one week. Together with the Eurogroup’s parallel decisions to grant bridge financing of 7bn and a principle agreement to grant a third bailout package, the Eurozone’s key players took an enormous leap of faith with Greece. As regards the macro-economic situation, the ECB’s analysis and outlook did not change from last month’s. The ECB still expects a broadening of the Eurozone’s economic recovery and gradually increasing inflations rates. Interestingly, the ECB added the slowdown in emerging markets to its downside risks to growth. Remarkably, despite the broadly unchanged macro-economic assessment, Draghi gave an important hint that market participants should forget about tapering any time soon. The ECB reincluded an important paragraph to its introductory statement, saying that the ECB would “continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.” In our view, a clear sign that – contrary to what the ECB said in early June – the ECB is concerned about the sell-off in bond markets and would react by stepping up, rather than reducing its QE activities; at least as long as the recovery is as fragile as it currently looks like. Most of the press conference was dedicated to Greece. Here, Draghi gave many long explanations and statements on the current state of play. The most remarkable two comments and announcements were: i) the ECB decided to increase ELA for Greek banks by 900 mln euro for one week. With this decision, the ECB fulfilled the request of the Bank of Greece and at least symbolically rewarded latest progress in the Greek crisis. ii) Draghi joined the current choir on debt relief for Greece, saying that “it is uncontroversial that debt relief is necessary”; and iii) Greek bonds would become eligible for the ECB’s QE programme once there is a bailout deal and the ESM has disbursed the first tranche of the money. And there was more news from the Eurozone today. After the principle decision that the Eurozone would offer Greece a 7bn euro bridge financing through the Commission’s rescue fund, the EFSM, the Eurogroup today also reached out to Greece. At the same time that the ECB press conference started, the Eurogroup issued a written statement, welcoming last night’s parliamentary green light for the Greek reforms. Moreover, the Eurogroup said that it would in principle grant a three-year bailout package to Greece, obviously only when all conditions as laid out in Monday’s agreement are met. All in all, let’s not get carried away by too much pathos. The Eurozone finance ministers just confirmed what their chiefs had already decided on Monday. Let’s stick to facts: Greece last night took an important first step towards receiving a third bailout package. More important and complex steps and negotiations will still follow. The decision to grant bridge financing as well as today’s ECB decision to increase ELA are no game changer, yet, but at least a symbolic leap of faith.

Eurozone - A deal to reach a deal

Grexit avoided, but for how long? After another marathon in Brussels, Eurozone leaders just decided on a path towards a third bailout package for Greece. We are still waiting for the official and written summit declaration to be released but here is our first take on the deal, based on having listened to the press conferences of Tusk, Juncker and Dijsselbloem as well as the ones of Merkel, Hollande and Tsipras. In short, the Greek government will now have to do almost everything the Greek people refused in last week’s referendum. As already reported earlier this morning, Eurozone creditors have come up with several demands before agreeing to a third bailout package. This compromise can be divided into three categories: i) rebuilding trust; ii) negotiations on a third bailout package; and iii) how to deal with Greek debt. As regards rebuilding trust, the Eurozone wanted Greece to pass several reforms through parliament by Wednesday, among these reforms were apparently the VAT and pension reforms but also improvements of the Greek statistical agency. Once the Greek government has agreed to the reforms, several Eurozone parliaments would decide on whether or not the official negotiations could be started. Only then, the negotiations between the three institutions (IMF, ECB, European Commission) on behalf of the ESM would start. Judging from earlier reports last night, these negotiations will not be easy as the Eurozone creditors have asked the Greek government to come up with new and more concrete proposals on how to compensate for the earlier withdrawn reforms to the economy and the public sector. If and when these negotiations would come to a successful end, Greece would get a bailout of around 85bn euro. Already in the coming two months, Greece would need 7bn euro until next week Monday (remember the bond held by the ECB), another 5bn euro until mid-August and up to 25bn (of which 10bn should be immediately) for the Greek banks. A prominent part of the potential deal, at least judging from the press conferences, is a privatization trust fund. This fund, based in Greece, should guarantee fresh money of 50bn euro, of which 12.5bn euro should be used for domestic investment. The rest of the money would be for debt repayments. Furthermore, the Troika is back. As stressed by Ms Merkel, the three institutions, formerly known as the Troika, will do the negotiations and would also be responsible for future surveillance and monitoring of progress. As Ms. Merkel said a third bailout package for Greece would not differ from earlier programmes or programmes for other Eurozone countries. Finally, the Eurozone returned the idea of some debt restructuring - not forgiveness – as part of a third bailout. The 2012 agreement of the Eurogroup was taken as a point of reference for some kind of debt relief. However, Ms. Merkel stressed that a haircut on debt was not an option but that debt relief could come in the form of longer maturities and/or grace period. Interestingly, she said that this form of debt relief could come earlier than anticipated in the 2012 statement. As regards the next steps, the Greek parliament now will have to pass the required reforms, then national Eurozone parliaments will have to give the green light to start the negotiations. Next week, the negotiations on a third package could start. In the meantime, the Eurogroup will look into options for bridge financing. While all leaders tried to give the deal a positive spin, doubts and concerns in our view outweigh optimism and euphoria. It starts with the fact that there actually is no deal, yet. This morning’s “deal” is an agreement to start negotiations once certain conditions are met. It’s a declaration of intent. Moreover, there is little in the deal that could give the Greek economy a short-term boost. Neither the 12.5bn from a still to be built trust fund nor the promised 35bn investment from the Juncker plan are tangible enough to provide results. Furthermore, even if Greek parliament would pass the required reforms, it is unclear whether Tsipras could politically survive the negotiations. In fact, this looks like a deal, he had been fighting against for a long while. All of this means that the champagne bottles should still remain in the fridge for a while. Eurozone politicians should rather be prepared for additional long meetings and negotiations. This morning’s agreement is a typical European fudge, made possible by the fact that the Greek people are currently still overwhelmingly in favour of Eurozone membership and the Eurozone’s willingness to avoid Grexit. This is not the most stable fundament for sustainable calm. To the contrary, the Grexit might have been avoided for a couple of weeks or – in a best-case scenario – for a couple of months, but as in any good horror movie, the ghosts will always return.

Eurozone: A Pyrrhic 'no'?

The ‘no’ vote in yesterday’s referendum seems to have strengthened Tsipras’ position. However, what looks like a stunning victory could quickly become a Pyrrhic ‘no’. The Greek people yesterday sent a strong message to the rest of Europe: a ‘no’ against austerity. According to the latest results, more than 60% of the Greek people said ‘no’ in the referendum. Officially, this ‘no’ was against a proposal from Greece’s creditors on 25 June to extend the bailout agreement against certain conditions. Whether the ‘no’ was also a vote against Greece’s membership within the Eurozone will never be clear. Ahead of the referendum, there was lots of speculation on what would happen if…now that there is clarity on the outcome of the referendum, the only thing that is clear is that nothing is clear. Only the coming days and hours will show what all involved players are really up to. In our view, the most likely next step is that the Greek government will want to return to Brussels to negotiate a new package with its Eurozone creditors, now backed with a strong mandate of the Greek people. It is hard to tell what the new demands or proposals of the Greek government will really be. The range of demands varies highly between different members of governments, ranging from a democratic change for Europe to no new austerity. The only element that will clearly be in any new Greek proposals is debt relief. In our view, the Eurozone will wait for Greece to make the first move. Initially, the Eurozone will insist on the technical issue that there no longer is a Greek bailout programme and that the Greek government would have to apply for a new programme. Interestingly, the German parliament and other parliaments would have to agree to a start of new formal negotiations. In this regards, it is noteworthy that new negotiations with Greece could also put the Eurozone’s inner stability to a test. It will not be easy to find a common strategy for any new negotiations that will be embraced by all Eurozone countries. Still, even if it is hard to see that the other Eurozone countries will give their Greek colleagues a warm welcome and that new negotiations are more fruitful than over the last five months, the outcome of the referendum will push the rest of the Eurozone to at least start talking. In theory, a compromise could be possible. A deal with less austerity but serious reforms, including tackling corruption and tax evasion, in Greece, obviously, would be the best outcome. Such a deal could even include some debt relief, but at the end of the ride and not upfront. This, however, would require that all parties involved could jump over their own shadows. In particular, the bad blood created by sometimes excessively inadequate language will be a large liability for any new negotiations. While politicians in the Eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work. Today, the ECB will have to decide on what to do with ELA. Apparently, the Greek central bank applied for an increase of ELA. The ‘no’ has not made the ECB’s life any easier. With every step that Greece is moving closer to total default or even a Grexit and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA. In our view, the ECB will not be the one pulling the trigger on Greece. As long as Eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels – even if it will create a bigger headache in Frankfurt every day. Still, this strategy will come to an end on 20 July. If Greece is not able to reimburse the ECB and would default on the bond, it is very hard to see the ECB continuing ELA. All in all, the ‘no’ vote in the referendum will lead to the expected uncertainty. At the current junction, the ‘no’ vote is not (yet) a first step towards a Grexit. Even if Eurozone politicians won’t have a huge appetite to talk to possibly triumphant Greek counterparts, they will never refuse initial talks. How such negotiations will end is hard to tell. A lot will depend on how ready to compromise both the Greek government and the other Eurozone governments are. We still think that eventually a sustainable compromise can be reached. However, the risk for a Grexit has never been higher than today. To a large extent, the current situation brings the Eurozone and Greece back to square one. Square one as it looked like in January: the Greek people have voted against austerity, the Greek government wants debt relief from its Eurozone peers and the Eurozone has troubles finding a united reaction. The big difference with January, however, is that lots of bad blood is on the floors, Greek banks are closed and Greece does not have a bailout programme. These three factors clearly do not argue in favour of a strong Greek position vis-à-vis the rest of the Eurozone. Did Tsipras celebrate a Pyrrhic ‘no’?

Eurozone: Tactical blame game moves on

Yesterday was another day with tactical moves from all sides in the Greek crisis and a Socrates-like conclusion: all we know is that we know nothing… Day one after Greece’s default on the IMF, which officially is not called default, and the end of its bailout programme offered again plenty of turbulences. A new letter from Tsipras, speculation about a cancellation of the referendum, Angela Merkel in the German parliament, Tsipras on television, a Eurogroup conference call and Varoufakis on the internet. This is the summary yet another ‘normal’ crazy day in the Greek crisis. Early in the morning, the media reported that Alexis Tsipras had sent a letter to the Eurozone creditors, claiming that he would accept almost all demands from the creditors with only minor changes. Creditors took their time to examine it thoroughly, postponing the planned Eurogroup teleconference to late afternoon. In the meantime, speculation emerged that Tsipras might still cancel the referendum and Eurozone politicians sent mixed signals. While French Finance Minister Sapin said he was still hoping to find an agreement ahead of the referendum, German politicians closed the door for negotiations before Sunday. Both Schaeuble and Merkel voiced their irritations with the Greek government and reiterated their position that no new negotiations with Greece were possible before the Sunday referendum. Interestingly, Merkel’s official stance has changed compared with several weeks ago. She now remarked that the door for Greece was not locked and that Greece should stay in the Eurozone, though not (any longer) at any price. After Merkel’s speech in German parliament, Tsipras made a televised address to the nation, turning again defiant. He confirmed that the referendum would be held on Sunday and urged his fellow citizens to vote no, reassuring Greeks that a no would not mean a rupture with Europe, but instead a necessary step for a better agreement with lenders. Later in the evening, the Eurogroup officially refused Tsipras’ request, postponing any further discussion to after the referendum. The Eurogroup also repeated that an extension of the bailout was no longer possible and that any new negotiations would start from scratch. Finally, Greek Finance Minister Varoufakis presented his six arguments for a “no” vote at the referendum in his blog on the internet. No matter how this crisis will end, at least Varoufakis has definitely brought new transparency to the Eurogroup. His article, however, is not very substantial, five out of six argument can be summarised as “vote ‘no’ because the creditors won’t give us debt relief”. Trying to understand why Tsipras does what he is doing, the only explanation is that his letter to the Eurogroup was just another tactical move to stay ahead of the Eurozone in the ongoing blame game, rather than a serious change of mind. The answer by Merkel and the Eurogroup was a strong signal that the Eurozone will not move anymore ahead of the referendum. Even if an agreement would be possible, too much trust has been destroyed that it is hard to see that the Eurozone would believe Tsipras this time around. What if he signs an agreement? The Eurozone would not have any evidence that this time is different and that the reforms would really be implemented. All of this means that the blame game will unfortunately continue in the days leading to the referendum. The only clarity that yesterday’s events have given, is that any spectacular and unexpected new turns before Sunday should be excluded. At least some clarity. However, for those hoping for clarity after the Sunday referendum, here is our disappointing view: the mess will go on. No matter what the outcome of the referendum will be. Let’s have a quick look at what could happen. In case of a ‘yes’ vote, the Eurozone would be willing to start new negotiations quickly but probably not with the current Greek government, rather with a government of national interest or a new government after new elections. The Eurozone would probably offer a third programme, coupling reasonable fiscal discipline (without excessively ambitious primary surplus targets) with a population/growth friendly investment programme. This could have a strong power against the surging populist movements in Spain and Italy. However, what would happen if Greece would get new elections and Tsipras would win them? In case of a ‘no’ vote, of course, things would be much more complicated. Tsipras would take it as a popular mandate for new negotiations in Brussels. It is hard to see that after the last events, the Eurozone has a huge appetite for these negotiations. On the other side, however, ignoring the Greek peoples’ will would also be hard. In our view, the Eurozone would not immediately let Greece fall after a ‘no’ vote but it would be very difficult for the ECB to continue ELA, even not at its current level. Even if negotiations between the Eurozone and Greece would continue after a ‘no’ vote, these negotiations would be very likely too difficult, defiant and slow for the ECB not to stop ELA. A new chaos and eventually a Grexit in the making. The inconvenient truth on the Greek referendum is that neither a ‘yes’ nor a ‘no’ vote will quickly lead to a solution and a return to normality.

Eurozone: It's (never) too late?

Another last-minute stunt from Tsipras could not avoid the end of the bailout programme and Greece missing the reimbursement of an IMF loan. Never a dull moment. The events in the Greek crisis over the last 24 hours once again had interesting twists and turns but this time around the hard facts remained unchanged: Greece has missed its payment to the IMF, the bailout programme has expired and the referendum is on track. Greek Prime Minister Tsipras pulled another rabbit out of his hat yesterday, submitting a new proposal to the Eurozone creditors. The proposal was a request for a two-year programme funded by the ESM (without IMF involvement). This programme would cover all Greek financial needs and would also include debt restructuring. According to media reports, the proposal did not include any new reform measures. Tsipras’ proposal came hours after reports that the European Commission had suggested that a new compromise might still be possible. Whether Tsipras’ move was a kind of late self-persuasion or just standard brinkmanship remains unclear. In our view, it was a last attempt to gain the upper hand in the ongoing blame game between Greece and the Eurozone, showing Greece’s so-called willingness to compromise. In a telephone conference last evening, the Eurozone finance ministers quickly discussed the proposal but the conclusion was clear: nice try but far too late. Eurogroup chairman Dijsselbloem said that “the political stance of the Greek government doesn’t appear to have changed”. Requests from Tsipras for an extension of Greece’s bailout programme or debt relief were not possible. Nevertheless, the Eurogroup will have another conference call tomorrow. All of this means that Greece will not reimburse an IMF loan and the official bailout programme has expired. As regards the IMF loan, we stick to our view that this will not trigger a credit event. According to the IMF rules, missing a payment will now start an entire procedure with several steps which after a period of up to 24 months could lead to the expulsion of Greece from the IMF. In addition, after one month, the EFSF would have the legal possibility to reclaim all already paid loans to Greece. Something, which in our view would only happen if the political will to keep Greece within the Eurozone at that moment in time would have entirely disappeared. All in all, missing the reimbursement of the IMF pushes Greece into the same league as Zimbabwe, Sudan and Somalia, but it would not lead to further crisis escalation ahead of the referendum. The same holds for the expiration of the second bailout programme. Technically-speaking, nothing will change in the short run. However, the fact that the programme has officially expired means that, legally, it cannot be extended anymore. No matter what the outcome of the referendum and consequent steps of the Greek government will be. From a legal and technical perspective, any new compromise would now start from scratch and would have to be a third bailout programme. In sum, yesterday’s events marked another symbolic step in the Greek crisis but also confirmed that the issue between Greece and its Eurozone creditors goes beyond numbers and substance. It’s the clash between an ideologically-driven government and a consensus-driven and compromise-oriented Eurozone. Even if it is tempting, we will refrain from sharing our memories of famous songs referring to “too late” but one thing is sure: only a miracle could solve the current stand-off in the Greece crisis before this weekend’s referendum.

Eurozone: Referendum, chaos, Grexit?

On Friday night, the course of the negotiations on the end of the second Greek programme took another unexpected twist. A crucial week for Greece and the Eurozone lies ahead. No one knows how this week will end or what will happen after Sunday. However, it increasingly looks as if there are only two options left: new elections or Grexit. Tsipras’ move is now another climax in the increasingly disturbed relationship between the Greek government and the rest of the Eurozone. Capital controls, bank holidays and increased uncertainty will accompany Greece on its way to the 5 July referendum. Whether this road will eventually end with the Grexit is still too early to tell, even though the probability of a Grexit has clearly increased over the last days. In short, absent a last-minute miracle, Greece is looking into an unprecedented financial and political future in the coming days. Whether this future will eventually also include the Grexit is currently impossible to tell. The expiration of the official bailout programme and the reimbursement of the IMF, both due on Tuesday, will in our view not automatically lead to a default and further turbulences. All involved Eurozone players will probably want to keep the situation as contained as possible, at least until next Sunday. Comments from Eurozone finance minsters suggest that the door for new negotiations in the days ahead of the referendum is closed, though not fully locked. The most interesting question is what will be next. As we have seen so often in the Greek crisis, nothing is granted. It is very hard to exactly forecast what will happen. Even the Greek government returning to the negotiations between now and Tuesday night cannot be excluded entirely. In our view, without fresh money from creditors, Greece is likely to be in arrears on a €1.6bn payment due on Tuesday to the IMF. While credit agencies have not classified this as it lent to Greece on the back of the missed payment to the IMF. Of course, this is very unlikely to happen. In our view, Greece will not technically default in the days leading to the referendum, neither as a consequence of not paying the IMF nor as a consequence of the end of the bailout programme. Another issue, however, is whether the Greek government can actually pay public salaries and pensions at the end of the month. Cash withdrawals from Greek banks have accelerated in recent days. It was therefore almost a holiday. At the writing of this note, it is unclear whether Greek banks will only close for one day or for the entire week. Such capital controls and one or several bank holidays, might have been the price, the ECB had asked to continue with ELA. For the ECB, the tricky question is how to deal with this new situation. An ECB referendum is not part of the ECB’s rulebook. This means that the ECB will have to take technical decisions on ELA, which in fact have political implications. In our view, the ECB will continue with ELA until the referendum. It can argue that up to the referendum the solvency of Greek banks has not significantly changed from last week. At least in the ECB’s eyes. Moreover, in our view, the ECB will be very hesitant to increase political pressure on Greece just a couple of days before the entire Greek population can make use of a democratic right. The days leading to the Greek referendum should therefore be dominated by uncertainty and possibly financial market turbulences – at least in Greece. It does not look as if peripheral spreads will widen significantly, given that financial markets will probably regard the entire crisis as a Greek crisis and contagion should be limited. If we are wrong and financial markets go crazy, the Eurozone has sufficient instruments to fight contagion. In our view, the ECB’s OMT programme might only be a remote option. The more efficient tool to fight short-term volatility would be QE. It would also help the ECB to solve its front-loading problem. With volatility but no chaos in the rest of the Eurozone in the coming days is our base case scenario, the other question is what will happen on (or better: after) Sunday. It is impossible for us to forecast the outcome of the referendum, but we can at least sense the domestic political strategy behind the latest twist in the Greek drama. As the creditors’ proposals cross a number of “red lines” of the Greek government, Tsipras is risking a break-up of the government or his own party. A YES vote would give him the authority to clinch a deal with the creditors without losing face because of broken electoral promises. In this case we would probably see the five-month extension of the current programme, during which a total of €15.5bn of financial support would be provided. This would allow the Greek government to implement the structural reforms, which could then lead to a third programme and some limited form of debt restructuring. This still looks a feasible scenario as in a poll on Saturday, published in the To Vimanewspaper, 57.5% of Greeks said the government should close a deal with the creditors, while two-thirds want Greece to remain in the Eurozone. However, this scenario basically means that the Greek problems will continue to haunt the Eurozone economy for some time to come. With a Greek government that has not been very co-operative until now and doesn’t seem to have the will to implement market-oriented reforms, one can already anticipate a new stand-off when the extension of the programme would end in November. A defiant Greek government is actually recommending the Greek population to vote NO. If this were to be the outcome, then we would be back to square one: the Greek population wants to remain in the Eurozone without accepting the terms of the creditor nations. However, the fatigue amongst the creditor nations with the negotiating tactics of the Greek government has reached the point, that a Greek exit from the Eurozone is now considered as a viable alternative. According to The Guardian, Merkel told Tsipras that the vote was “a choice between the euro and the drachma”. A NO vote would not necessarily immediately lead to a Greek exit. We might actually see Greece also default on the ECB reimbursement on 20 July, without adverse consequences. However, this would necessitate the ECB to continue providing ELA to the Greek banks (already a stretch) and capital controls and limits on bank withdrawals will have to remain in place to avoid a collapse of the banking sector. However, a “no” vote and a default on the bond held by the ECB, even if not technically, is very likely to trigger an end to ELA. As a consequence, Greek banks would need to be recapitalsied (and/or nationalised) with money the Greek government does not have. IOUs or a dual currency would be the solution and, consequently, lead to a Grexit (see also our earlier note with an Q&A on the Grexit). In all cases, one thing seems quite sure: the recession in Greece would most probably deepen and more unrest is to be anticipated. The Greek mythology offers lots of interesting stories. Many of these stories seem to come back in the current Greek crisis, which took another unexpected and exciting twist over the weekend. Looking at the latest events, we see memories of Hydra and Hubris. Hydra was the serpent-like water monster with reptilian traits, which possessed many heads. For each head cut off, it grew two more. Hybris, or Hubris, on the other hand was the goddess of insolence, violence, reckless pride, arrogance and outrageous behaviour. Or simply put, an excess of ambition, pride, etc,ultimately causing the transgressor's ruin. Parallels with the current Greek crisis are obvious. Looking beyond the coming days and the next weekend, the Greek referendum does not only mark a new climax in the Greek crisis but also the end of muddling through in the Eurozone – even if the Greek people vote in favour of the proposal and indirectly of their membership in the Eurozone. Will there now be a series of referenda on the Eurozone membership? It is time to speed up institutional reforms and make the monetary union sustainable. The latest report of the five European presidents was supposed to kick-start the discussions. Discussions which should quickly shift to warp speed, if the Eurozone wants to consign Greek mythologies back to the realms of fantasy.