Column: Love brand

Een positief effect heeft de Brexit in ieder geval: Europa is al drie weken lang weer thema nummer een. De discussie over de toekomst van Europa, het meer minder of gewoon anders, is het gesprek van de dag. Europa moet de burgers weer in het hart raken. Europa moet een “love brand” worden. De afgelopen dagen hebben echter laten zien dat de Duitse zoektocht naar het juiste recept voor meer emoties en brede steun voor Europa weer eindigt met een typisch Duits reflex: meer regels en meer straffen. Een vergissing. 

 

Opnieuw doet Europa de zoveelste poging het zieltogende Stabiliteitspact leven in te blazen door sancties tegen Portugal en Spanje aan te kondigen, vanwege achterblijvende bezuinigingen en het niet halen van de begrotingsdoelstellingen. Vooral uit Duitsland klonk de luide roep om striktere handhaving van de regels, zeker na de Brexit. Dit zou het vertrouwen terugbrengen. De disciplinerende rol van de begrotingsregels en het vertrouwen blijven natuurlijk weg als Frankrijk in een vergelijkbare situatie niet zo hard wordt aangepakt. “Omdat het Frankrijk is”, zoals Jean-Claude Juncker ooit zei. Daarbij is het economische nut om landen, die al jaren bezuinigingen achter de rug hebben, met sancties te straffen meer dan twijfelachtig. De overheidsfinanciën zullen daardoor niet houdbaarder worden. Een lange termijn plan en meer economische groei zouden eerder wonderen doen. Duidelijk is dat sancties bij de Spaanse en Portugese bevolking zeker averechts zullen werken. Het anti-Europese sentiment verdwijnt hierdoor zeker niet.

 

De crises rondom de Italiaanse banken is een ander verhaal. Door de nieuwe regel van een bail-in – schuldeisers van banken moeten mee betalen aan bankenreddingen – zal de desastreuze verbinding tussen bankenreddingen en schuldencrisissen worden doorbroken. Banken zullen niet meer in staat zijn om hele landen in een dreigend faillissement te duwen. In Italië luidt deze bail-in echter mogelijk het einde in van de politieke carrière van premier Renzi. Veel kleine beleggers in Italië hebben hun spaarcentjes, in de veronderstelling van veiligheid, in aandelen en obligaties van banken hebben gestopt. Een bail-in zou tot veel kleine persoonlijke drama’s leiden. Net als bij Portugal en Spanje zou het aandringen op implementatie van de Europese regels ongeruste burgers in de open armen van de populisten drijven.

 

De reflex om de gevolgen van een Brexit en opkomende populisme met meer regels en zwaardere straffen te bestrijden kan als schieten in de eigen voet worden beschouwd. Het enige resultaat is frustratie, onmacht en daarmee een vruchtbare bodem voor eurofobie. In Noord-Europa, waar het gevoel van superioriteit en wantrouwen richting Zuid-Europa verder toeneemt, stijgt de frustratie vanwege het niet naleven van de regels. En in Zuid-Europa stijgt de frustratie omdat zinloze regels tot nog meer ellende leiden. Een ‘love brand’ zal Europa zo  niet worden.

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

Column: De geur van emotie

Na een rommelige start loopt het bij Die Mannschaft in Frankrijk weer op rolletjes. Bondscoach Löw heeft na twee mindere wedstrijden geluisterd naar de 82 miljoen bondscoaches en twee basisspelers uitgewisseld. Sindsdien draait de ploeg gesmeerd. Wel jammer alleen dat morgen al de gevreesde aartsvijand Italië op Die Mannschaft wacht. Nog nooit heeft Duitsland bij een toernooi van Italië gewonnen. De angst voor een vroegtijdig vertrek uit Frankrijk is groot bij supporters en amateur coaches. Maar een coole Löw heeft een heel land gerustgesteld, door relaxed een espresso slurpend uit te leggen, dat er geen Italië-trauma is en dat Die Mannschaft gewoon gaat winnen. Wat een contrast met Angela Merkel! Voordat Angela Merkel deze week naar Brussel vertrok, legde ze in het Duitse parlement nog even uit wat de Duitse positie is rondom de Brexit. Het was een typisch Merkel optreden: zakelijk, terughoudend, niets vastleggend, geen drama. Een goede beschrijving van de stand van zaken en een onderkoelde analyse. Een soort van ‘Brexit on the rocks’, ‘stirred, not shaken’. Dit beleid, deze stijl, hebben Merkel tot de machtigste vrouw in Europa gemaakt. Zij is zo door de financiële, euro- en Griekenland crisis gerold. Maar zelfs al is business as usual in onrustige tijden enorm rust gevend, het zal onvoldoende zijn om Europa uit deze - niet meer en niet minder existentiële - crisis, te leiden. Hoe had het anders gekund? Merkel relaxed met een espresso of eens met een gepassioneerde speech, die de jonge generatie in vuur en vlam zet. Een speech, met virale hit en ‘like’ potentie. Een speech met een duidelijke boodschap, het liefst met een duidelijke visie. Zo’n speech was in de huidige omstandigheden niet moeilijk geweest. Maar drie punten zijn er nodig. Een, maak duidelijk dat je er alles zult doen om de Britten zo snel mogelijk uit de EU te zetten. In alle vriendschap. Maar een gijzeling van de EU van– meer dan - twee jaar afwachten en onderhandelen is niet acceptabel. Twee, het is tijd voor een nieuw begin voor Europa. Geen discussie meer over meer óf minder Europa, maar een discussie over meer én minder. Een open, eerlijke en emotionele discussie over op welke onderwerpen Europa meer integratie nodig heeft en waar minder. Een niet moraliserende discussie, waar geen goed of slecht bestaat en waarbij het einde open is. Tenslotte heeft Europa een “man on the moon” project nodig. Waarmee kan de EU weer de harten laat raken? Een sociaal Europa? Een welvarend Europa? Een innovatief Europa of een eindelijk weer groeiend Europa door grensoverschrijdende investeringen? Maar vooral, een doel met emotie. Ook verliest Die Mannschaft morgen van Italië, een coole Jogi Löw heeft heel Duitsland wel even laten dromen. Wat Jogi ook doet, het in zijn broek grabbelen of relaxed het Duitse winconcept uitleggen, hij lokt emotie uit. Iets meer Löw bij Merkel zou heel Europa goed doen. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

Brexit - ein schrecklich historischer Tag

Für einen bekennenden Europäer wie mich aber auch ein schrecklicher Tag. Auch wenn das offizielle Endergebnis noch nicht da ist, scheint das Brexit-Lager uneinholbar vorne zu liegen. Zusammen mit den Kollegen aus London werden wir am frühen Vormittag eine längere Research Note veröffentlichen. Bevor diese kommt, hier schon eine kurze Stellungnahme. Es sieht so aus, als ob Europas schlimmster Alptraum Wahrheit geworden ist. Sollte sich das Ergebnis bewahrheiten, werden die wirtschaftlichen und politischen Folgen noch lange zu fühlen sein. Die erste Marktreaktion gibt schon einen guten Vorgeschmack. Es steht ein langer, schwieriger und dreckiger Scheidungsprozess an. Es wird nicht nur schwierige Verhandlungen mit Großbritannien geben. Europa wird sich auch mit sich selbst beschäftigen müssen. Nach dem heutigen Tag wird Europa nie mehr so sein wie bisher. Der Geist des Populismus und antieuropäischer Haltungen ist aus der Flasche entwichen und wird nur sehr schwer einzufangen sein. Europa befindet sich in einer existentiellen, in einer Identitätskrise. Nach dem Brexit ist vor der nächsten Exit-Gefahr. Schon jetzt gibt es Spekulationen über mögliche EU-Abstimmungen in Frankreich und den Niederlanden; zwei Gründungsmitglieder der EU. Die Wahrscheinlichkeit einer schleichenden Desintegration der EU und auch der Eurozone nimmt zu. Die Gefahr, dass die nächste Generation, unsere Kinder, diese Scherben aufräumen muss, auch. Europa muss die Kritik und Skepsis in Teilen der Bevölkerung ernst nehmen. Die aktuelle Europa-Diskussion dreht sich fast immer nur um ‚mehr oder weniger’ Europa. Europa braucht eine neue differenzierte Diskussion über die Zukunft Europas. Eine Diskussion, in der positive Alternativen aufgezeigt und die Ängste ernst genommen werden. Eine Diskussion, die nicht sich nicht mehr um ‚mehr oder weniger’ drehen sollte, sondern um ‚mehr und weniger’. So könnte ein historisch schrecklicher Tag irgendwann vielleicht doch einmal als Anfang eines besseren Europas in den Geschichtsbüchern stehen. Das ist aber vielleicht nur der Traum eines verträumten Europäers.

Another 'yes but...' from Karlsruhe

The German Constitutional Court just released its final verdict in the case against the ECB’s OMT programme. The Court rejects the complaint but does only give half-green light for OMT. < Summary Line Germany’s Constitutional Court just released its ruling in the case against the ECB’s OMT programme. The Court officially rejects the complaint against OMT. However, the details of the Court’s ruling suggest that rejecting a complaint does not necessarily mean that the Court embraces OMT. Although we are no legal experts, the bottom line of the Court’s ruling seem to be: the Court grudgingly acknowledges the ECB’s independence on monetary policy matters and that European legal matters do not fall into the responsibility of the German Court. Moreover, the Bundesbank can only participate in the OMT under certain conditions. Remember, the OMT programme has been the ECB’s strongest weapon during the peak times of the euro crisis and it is a programme which has never cost a single euro. The OMT has been the fundament under Mario Draghi’s famous “whatever it takes” words. It is the programme with which the ECB announced to buy government bonds of crisis-stressed countries under certain conditions, as e.g. that the country needs be in a bailout programme. The “whatever it takes” words combined with OMT were a game changer during the darkest times of the euro crisis, giving financial markets the impression that the ECB could be a last lender of resort for the Eurozone. Consequently, spreads between government bond yields narrowed again. But the legality of the programme has been challenged by 37,000 German plaintiffs who argue that OMT violates the EU’s prohibition on the “monetary financing” of governments. Last year, the German Court had asked the European Court of Justice for legal advice (which is different from delegating the entire case to the European level). The ECJ’s advice was clearly supportive for the ECB. With today’s final ruling, the German Constitutional Court confirms the ECJ’s ruling but also indirectly criticizes the ECJ for not having investigated deep enough whether ECB’s own assessment on need for OMT was justified. In its ruling, the German Court states that it took the ECB’s own assessment for granted. While the German Court has rejected the case against the OMT, it still has put conditions on the Bundesbank’s participation. Namely: bond purchases should be limited in volume and should not be announced beforehand. Moreover, purchased bonds should only held until maturity in exceptional cases. The entire case has not only brought German opposition against the ECB’s non-standard monetary policy measures into court rooms, it has also been a nice illustration of the ongoing struggle and difficulties in Europe and the Eurozone to delegate powers and responsibility from the national to the European level. Similar to the British referendum in two days from now, the German Court’s ruling had the potential to shake the European Union or at least the monetary union to its very foundations. Fortunately, it did not. This ruling on a programme which has never ever been used gives the ECB enough room and backing to continue with QE and to stand ready to eventually fight any emergencies on financial markets in case of a Brexit-vote on Friday morning. At the same time, however, the ruling was not convincing or strict enough that it will stop German opposition against current ECB policies or prevent new lawsuits against the ECB. It was a typical “yes, but…” ruling from Karlsruhe. Some could even be tempted to call the Court a sore loser who is still struggling to find a balance between European and national interests and powers. Clearly not the only one in Europe currently.

Column: De sudoku van Schäuble

Vorige week zat ik toevallig met Wolfgang Schäuble in hetzelfde vliegtuig. Toen ik binnenkwam zat hij achter een muur van bodyguards en maakte hij met stoïcijnse rust een sudoku. Even overviel mij de aandrang Schäuble aan te spreken, maar de correcte Duitser in mij durfde het toch niet. Al te graag had ik mijn persoonlijke inzicht aan hem willen voorleggen.

Ja, de Duitse economie loopt als een trein. In het eerste kwartaal van het jaar kregen alle pessimisten een draai om de oren. Ondanks onrust op de financiële markten, de afkoeling van de Chinese economie en negatieve gevolgen van de lage olieprijzen op belangrijke Duitse exportmarkten blijft de Duitse economie groeien. De reden is een stevige binnenlandse vraag vanwege de goed draaiende arbeidsmarkt, de lage inflatie, de lage rente en hogere staatsuitgaven vanwege de vluchtelingen. Maar, mijnheer Schäuble, een economie, die vooral draait op consumptie en de bouwsector, waren dat niet juist de modellen, die u bij de periferielanden zo hard heeft bekritiseerd? En waar, mijnheer Schäuble, zijn de zo broodnodige structurele hervormingen in Duitsland?

Het u bekende IMF heeft de afgelopen week al op twee keer pijnlijk economisch advies aan Berlijn gestuurd. Het ging daarbij niet, zoals in het verleden over te veel Duitse exporten of meer overheidsuitgaven voor investeringen, advies dat u regelmatig had afgedaan als naïef of onzin. Het ging om iets wat u in het hart zou moeten raken: structurele hervormingen. Het IMF heeft keurig voorgerekend hoe een verlaging van de loonbelasting in het laag-loon-segment, een door de overheid gefinancierde uitbreiding van kinderopvang en een verdere deregulering van de dienstensector positieve gevolgen voor de groei en de werkgelegenheid zou hebben. Een verdere hervorming van het pensioenstelsel zoals het verbinden van de pensioengerechtigde leeftijd aan de levensverwachtingen zou ook geen slecht idee zijn. Was het niet zo, dat u altijd heel graag gebruik maakte van de expertise van het IMF bij de reddingsprogramma’s voor de Zuid-Europese probleemlanden? Het lijkt er evenwel op, dat zodra het om uw eigen land gaat, u dit advies redelijk makkelijk naast u neerlegt.

Ik begrijp uiteraard uw hang naar houdbare overheidsfinanciën. Zeker voor een vergrijzende economie. Maar in tijden van negatieve rentes en lage inflatie gaat het bij de schulden niet alleen maar om de teller (de schulden), maar ook om de noemer (de groei). Het is net als bij sudoku. Denkt u niet ook dat Duitsland eigenlijk een unieke kans heeft om eens goede economische tijden te gebruiken voor ingrijpende toekomstgeoriënteerde hervormingen?

Ach, ook voor mij een gemiste kans om actief invloed te nemen op de Duitse politiek. Volgende keer zal ik voor Schäuble het vliegtuig in rennen en een kopie van deze uitgave van De Tijd alvast op zijn stoel leggen.

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

German economy surges in Q1

The German economy grew by 0.7% QoQ in the first quarter of 2016, from 0.3% QoQ in the final quarter of 2015. The strongest quarterly performance since the first quarter of 2014. On the year, GDP was up by 1.6% (in working day adjusted terms). The GDP components will only be released at the end of the month but judging from the available monthly data and the statistical agency’s press release, growth in the first quarter was mainly driven by domestic factors. Particularly, activity in the construction sector boomed on the back of the mild winter weather. The latest recovery of the German economy lasts already for seven quarters. Without the small stagnation in the second quarter of 2014, the economy could now look back at twelve consecutive quarters of economic growth. Very impressive. Moreover, during this lucky streak, the growth drivers have changed. Initially boosted by strong industrial production and exports, the economy is currently much more driven by private consumption, construction and a bit of exports. The industrial backbone has weakened significantly. Looking ahead, at least in the near term, this new growth mix should further support growth. Against this background of a long and strong growth performance, it does not really come as a surprise that many German policymakers have become complacent, some even big-headed, or at least not being very open for criticism or proposals to further improve the economic performance. In fact, today’s data provide new ammunition for the proponents of ‘there is no need for change’. Such an attitude stands in sharp contrast with the latest round of international pressure on Germany to implement some change. After criticism on Germany’s high trade surplus and rather naive recommendations to reduce the deficit, it was then a call to increase domestic wages and investments and has now become a clear disclosure of Germany’s lack of structural reforms. First, there was the OECD calling for tax reductions. Now, very recently it has been the IMF proposing infrastructure investments and new reforms in the labour market and the pension system. While the first two phases of international criticism were easily shaken off by many German policymakers, the latest phase is actually hitting the bull’s eye. It hits the German economic establishment in the heart as they have always been the most vocal advocates of structural reforms elsewhere. Now structural reforms are coming home and it will be interesting to watch what the official reaction to the latest IMF proposals will be. After all, it has always been the German government asking for IMF involvement in the euro crisis management, due to the IMF’s uncontested expertise. However, roughly one year ahead of the next national elections, there is the risk that no new reforms will be implemented before the elections. If true, it could eventually turn out be a missed unique opportunity. Implementing new reforms in good times is always easier then implementing them in bad times. Unfortunately, it almost never happens. Today’s data are another sign of Germany’s economic strength. At least at first glance. The economy defied the financial market turmoil at the start of the year as well as the Chinese slowdown. Even if many Germans don’t want to hear it, strong domestic activity is also the result of the ECB’s loose monetary policy. At second glance, however, the strong growth performance also shows what currently is the biggest risk for the German economy: complacency. Ironically, with growth driven by construction and consumption and a government which is reluctant to follow up on international advice to implement structural reforms, the German economy has almost started to resemble peripheral characteristics.

Column: Puberende Duitsers

Als mijn kinderen op het matje worden geroepen omdat ze veel te laat naar bed gaan of veel te lang op de computer spelen, is hun defensiestrategie vooral heel hard te schreeuwen en zo snel mogelijk naar de andere te wijzen als de echte zondebok. De gespeelde opwinding is de aanvallende verdediging om hun eigen gedrag te maskeren, wetende dat de ouders liever rust hebben in huis. Dat gedrag oefenen biedt kansen voor een carrière in de Duitse politiek. Want heel hard schreeuwen en een zondebok zoeken ter afleiding van de eigen tekortkomingen is de nieuwste trend in de Duitse politiek. Duitse kritiek op de Europese Centrale Bank (ECB) is niet nieuw. In de loop van de eurocrisis hebben de Duitse centraal bankiers Axel Weber en Jürgen Stark zelfs de handdoek in de ring gegooid en zijn ze vertrokken omdat ze het niet eens waren met het beleid van de ECB. Dat de kritiek op de ECB nu uit de allerhoogste rangen van de Duitse politiek komt, is echter nieuw. Met zijn uitspraak dat het beleid van de ECB verantwoordelijk is voor de opkomst van de antimigratiepartij AfD in Duitsland ging minister van Financiën en politiek veteraan Wolfgang Schäuble te ver. Iemand die zó van regels en afspraken houdt, zou moeten weten dat de Europese verdragen de Europese politici verbieden invloed uit te oefenen op de ECB. Wat bezielt Schäuble? Meer dan een jaar voor de Duitse verkiezingen lijkt Schäuble een belangrijke doelgroep voor zich te willen claimen: de spaarders en de gepensioneerden. Dat is met afstand de grootste groep kiezers in Duitsland. Met zijn kritiek op de ECB zoekt Schäuble een externe zondebok en kan hij zich opwerpen als de grote redder. Hij speelt echter met vuur. Ook al heeft Schäuble zijn kritiek inmiddels gerelativeerd, de geest is uit de fles. Schäuble heeft de Duitse kritiek op de ECB gelegitimeerd. En zo is een nieuw rondje hevige ECB-bashing begonnen, door politici, wetenschappers en zelfbenoemde experts. Gevolgen voor het beleid van de ECB zal dat niet hebben. De Duitsers staan te geïsoleerd in de ECB om een verschil te maken. Om een oud citaat van Bild-Zeitung te misbruiken: Duitse kritiek hoort bij het ECB-beleid zoals tomatensaus bij spaghetti. Het ergste aan de kritiek is dat ze de aandacht afleidt van de echte problemen in Duitsland. De banksector en het pensioenstelsel zijn al langer aan hervormingen toe. De lage rente is niet de oorzaak van die problemen, alleen brengt de lange rente de problemen nu sneller aan de oppervlakte. Ook leidt de ECB-bashing de aandacht af van de vraag waarom de regering bij negatieve rentes op staatsobligaties niet méér investeert, en waar de grote Duitse stap naar meer integratie in de eurozone blijft. Voor de toekomst van de eurozone en voor de rust in mijn gezin is het te hopen dat het pubergedrag snel verandert. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

No helicopters at the ECB, not even in the basement

Well, some ECB watchers today might regret that they did not enjoy one of the first sunny days of the year but stayed inside following a rather eventless, not to say dull, ECB press conference. As expected the ECB did not announce any new measures but sent a clear dovish signal, keeping the door open for additional easing in the future.

 

The ECB’s macro-economic assessment remained unchanged from the March meeting. Risks to the economic outlook are still tilted to the downside and the inflation outlook also remains subdued. Consequently, there was no need for the ECB to change anything in its current monetary policy stance. Interestingly, ECB president Draghi sounded more optimistic about the pass-through of monetary stimulus through the banking sector, referring to the latest Bank Lending Survey. Nevertheless, the outlook for both growth and inflation is still shaky and uncertain enough for the ECB to stay on high alert.

 

In a rather dull press conference, three topics stood out: the announcement of the ECB’s corporate bond purchasing programme, helicopter money and, last but not least, a reaction to the latest German war of words with the ECB. As regards corporate bonds, the ECB will start purchases in June. The ECB will purchase investment grade bonds from non-bank corporates with a maturity up to 30 years. The ECB could buy up to 70% of each issuance. No numerical target for the monthly corporate bond purchases was announced. As regards helicopter money, Draghi shot down any helicopter some market participants might have seen (or wished to have seen) in recent weeks. According to Draghi, the ECB had never discussed the concept of helicopter money. Finally, as regards the latest reencounter with Germany on low interest rates and unconventional measures, Draghi clearly said that the ECB obeyed the law, not politicians, and stressed the ECB’s independence. Moreover, he remarked that low interest rates were not the cause of problems in the German pension system and should not be mistaken with long-term structural problems. Draghi’s final comment on the debate with Germany was even clearer: too much below-the-belt criticism could eventually have a negative impact on confidence, thereby forcing the ECB to stick to its loose and unconventional monetary policy for longer than necessary.

 

All in all, there are two key take-aways from today’s ECB meeting: first of all, the ECB is still on high alert and would be willing to implement even more stimulus if the recovery falters or low inflation leads to negative second round effects (even though it’s unclear what these measures would really be). And, secondly, the ECB does not look willing at all to alter its monetary policies as a result of German criticism. German has become a fact of life but it will not change the ECB’s life.

 

Germany's war of words against the ECB

German criticism on the ECB’s monetary policy throughout the crisis is not new. In recent days, however, it has entered a new stage.

It is part of the new era of information technology and media that every single comment of important policymakers and politicians is eventually broadcasted into the wide world. Even if it is a comment at the margins of ceremony of a small economic association in an even smaller city outside of Frankfurt. Last Friday, German Finance Minister Schäuble connected the recent gains of the AfD party in German regional elections at least partly to the loose monetary policy of the ECB. According to wire reports, Schaeuble said that he had told ECB President Draghi that 50% of the results of the AfD party were the consequence of the ECB’s loose and low interest rate policy.

Schäuble’s comments fit into a series of verbal attacks on the ECB by German experts, observers and regional politiicans. They could be seen as a preparation for the upcoming IMF Spring Meetings in Washington, D.C., this week, where probably the pressure on Germany to change its stance on austerity and become more stimulus-oritented will be increased again. Moreover, the German government’s position in the Greek crisis will also be put to a test again in the coming weeks. However, the tone and the direct attack of the ECB by a senior, or better one of the two most prominent, members of German government is unprecedented. Let’s not forget, Schäuble’s comments do also conflict with – at least the spirit of – the European Treaties. Article 130 says that “Community institutions and bodies and the governments of the Member States undertake to respect this principle [of central bank independence] and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks”.

German criticism of the ECB’s loose monetary policy, zero and negative interest rates and other unconventional measures is not new. It is based on the argument that low interest rates are hurting German savers (and banks and insurers) and prevent rather than stimulate structural reforms in the Eurozone periphery. What this argument, however, often fails to admit is that German savers would be worse off had the ECB stayed at the sidelines, that it is the Eurozone governments (including the German government) which fail to accelerate further reforms (be it national structural reforms or institutional reforms of the monetary union) and that the German government itself is rather falling behind on new structural reforms to increase potential growth. Finally, it has been the slow pace and inactivity of governments which frequently pushed the ECB into the position of Eurozone fire brigade. It is not a role the ECB took voluntarily.

In our view, there is no easy or one-dimensional solution for the Eurozone to gain more momentum. Obviously, the German position is not wrong, structural reforms and sustainable public finances are one of the main requirements, but it is not the entire solution. Other growth-enhancing measures are also needed. Particularly in a Eurozone, in which populist and separatist parties are gaining momentum. This includes loose monetary policy but also fiscal policies. To tackle weak growth, adverse political trends and a possible disintegration of the Eurozone, a multi-layer approach is needed.

Consequently, the current war of words is a superfluous as a fifth person on a double date. It is simply counterproductive. It won’t change the ECB’s monetary policy, which contrary to what some Germans might think, is not going after Germans’ savings but is simply trying to revive the Eurozone economy and let the monetary union survive.

Weak revival of German exports

Some relief but no reason to cheer. February trade data just showed that the German export sector still struggles to gain momentum. After four declines in the last six months, German exports increased by 1.3% MoM in February. As imports only increased by 0.4% MoM, from 1.3% MoM in January, the seasonally-adjusted trade balance improved to 20.3 bn euro, from 13.4 bn in January. German exports have lost parts of their magic and strength. In the past always a reliable growth engine, net exports on average did not contribute anything to quarterly GDP growth over the last two years. In 2015, net exports even were a drag on growth. So much about export world champion. The weaker euro was only partly able to cushion the negative impact from weaker external demand, particularly from China and oil-exporting countries. The negative impact from low oil prices on the German economy through weaker exports is mainly felt in the manufacturing sector. Looking ahead, it does not look as if exports would quickly return as a powerful growth engine. Foreign orders have dropped by more than 7% since last summer, further reflecting a broader weakness in Germany’s main trading partners. Moreover, the tailwinds of the weak currency are also fading away. Since late-November, the euro has appreciated by more than 6 ½% vis-à-vis the US dollar. At the same time, the trade-weighted exchange rate appreciated by some 5%. This strengthening of the exchange rate should also affect German exports in the coming months. With strong consumption, a booming construction sector but stagnating industry and exports as well as a reprimand from international institutions to finally step up reform efforts, the Eurozone’s largest economy is losing some of its luster. Admittedly, it is a bit tongue in cheek, but after this week’s macro data, one could even start to think the Eurozone periphery these days starts in Germany.

German new orders disappoint in February

Lost in stagnation. German new orders dropped sharply in February, adding to evidence of continued stagnation in the German industry. New orders declined by 1.2% MoM, from an upwardly revised increase of 0.5% MoM in dropped in January. On the year, new orders were up by 0.5%. The last months have not been easy for the German industry. Since May last year, new orders have dropped in six out of ten months. Interestingly, the February drop was driven by falling foreign demand (-2.7% MoM), whole domestic demand picked up somewhat after a two-months slump. While the German industry is struggling to gain momentum, the Eurozone’s most favorite crisis is back. Leaked minutes from an internal IMF discussion and the arrival of Greece’s creditors in Athens is a good reminder that the Greek crisis could easily escalate again and lead to another hot Greek summer in the Eurozone. The discussion on new financing gaps, the lack of structural reforms and debt restructurings or forgiveness sounds too familiar. In Germany, politicians yesterday reacted with the typical reflex of “there is no need for debt forgiveness in Greece”. In our view, focusing only on a possible debt restructuring does not capture the entire problem. In the end, the lack of growth in Greece and other Eurozone countries could easily put new pressure on the German government to reassess its entire crisis management. Eventually it could come down to a decision between a growth stimulus for Greece, debt restructuring or Grexit. We don’t dare to tell which option the German government would choose. Against the background of potential new uncertainties, the outlook for the German industry remains anything but rosy. Product expectations have already come down significantly since the summer and are now at the lowest level since March 2013. At the same time, order books have narrowed. The only encouraging signal from the German industry is the latest drop in inventories since the beginning of the year. All in all, today’s new orders were another piece of evidence that the German industry is treading water, as it is suffering from a cooling of global activity.

Column - Bloedend hart

Mijn hart bloedt voor Brussel, het gekke warrige ondoorgrondelijke Brussel waar ik tien jaar woonde en waar mijn kinderen hun jeugd doorbrachten. Het Brussel, waar ik nog zo vaak kom om vrienden en collega's te zien en gewoon de sfeer van de stad te voelen. Het is moeilijk om in deze dagen emoties, verdriet, analyse en economie in een column te pakken. Proberen wil ik het toch. Gek genoeg zijn de Europese leiders er bij terreuraanslagen er als de kippen bij om de terreurdaad als Europees te labellen en als aanslag op alle Europeanen te zien. Dat gebeurde in Parijs en nu ook in Brussel. De eerdere aanslagen in Madrid en London waren nog te veel verbonden aan de aanslagen in de Verenigde Staten. Met President Hollande voorop, stonden de leiders weer schouder aan schouder om te laten zien dat Europa niet voor tirannen zal zwichten. Maar zo langzaam klinken ook deze woorden hol. Als oplossing om terrorisme voor te zijn, wordt het uitwisselen van gegevens genoemd en meer samenwerking door inlichtingendiensten en politie. Deze woorden klinken al sinds de Europese Akte van 1986 en de verdragen van Maastricht, Amsterdam en Lissabon. En ondertussen kwamen er nauwelijks bevoegdheden voor de EU en bespioneerden de nationale inlichtingendiensten elkaar en elkaars leiders. Als het om markt en geld draaide, was de Europese Unie wel gewild, maar zodra het om veiligheid en de moraliteit van justitie ging, niet. De terreuraanslagen in Parijs en Brussel laten zien dat de terroristen zijn wat de EU niet is: echt internationaal, samenwerkend over de grenzen, grenzeloos in hun mobiliteit en één in hun doel, wat dat doel dan ook moge zijn. Zij blijken over een internationaal inlichtingen - en financieel netwerk te beschikken en wisselen informatie uit. Hoe kan het dat terroristen slagen in eenheid waar Europa langzaam desintegreert, vanwege de nationale belangenstrijd en het gevecht over wie het voor het zeggen heeft? Terwijl de kille economische analyse eigenlijk zegt dat terroristische aanslagen nauwelijks een meetbaar effect hebben op de economie, zo vrees ik dat het deze keer anders is. Parijs en Brussel zijn een keerpunt met blijvende gevolgen. Het grenzeloze Europa is met de aanslagen van Brussel een stuk verder richting geschiedenis opgeschoven. En ook benadrukken de regeringsleiders juist nu de Europese geest, zo ziet de werkelijkheid toch behoorlijk anders uit. Het gevaar is dat de aanslagen de huidige disintegratie van Europa zullen bevorderen. Het terugdraaien van Schengen zal waarschijnlijk worden versneld, de aanhangers van een Brexit zullen rugwind krijgen en de anti-vluchtelingen sfeer en de steun voor het AfD in Duitsland zullen aan vaart winnen. Terwijl mijn hart bloedt voor Brussel en België, zo bloedt mijn hart minstens zo sterk voor het verlies van het Europese ideaal door niet te willen delen. Deze column verscheen ook in het Belgische dagblad "De Tijd"

German Ifo surprises in March

It’s hard to comment on economic sentiment indicators, while watching horrible scenes from my former home city. What initially was supposed to be a German economic sentiment day, with releases of the three most prominent confidence indicators on one day, has all of a sudden and tragically become a sad day for Europe. Still, let’s give it a try to return to economics for a minute. Germany’s most prominent indicator, the just released Ifo index, rebounded in March to 106.7, from 105.7 in February. Both, the current assessment and the expectations component increased in March; showing that German businesses seem to have shaken off fears of long-lasting global slowdown. While commentators are currently heatedly discussing the risks of a wide-spread global slowdown, the German economy shows solid resistance. While soft indicators have disappointed in recent months, hard data have rebounded at the start of the year. Actually, hard data – except for exports - in January has actually surprised to the upside and industrial production, construction, car registrations and retail sales were actually higher than in the final quarter of 2015. At the same time, the continued strength of the service sector seems to make up for a more structural slowdown in industrial production in the wake of weaker demand from too many important export destinations. Today’s Ifo index adds to increased optimism. The Ifo was the second German sentiment indicator released today. Earlier this morning, the PMI remained unchanged at 54.1, pointing to continued growth in the first quarter. At 11am CET, the ZEW will close this German sentiment day, shedding some first light on how investors assess the ECB’s latest monetary policy action and whether or not they still believe in Mario Draghi’s magic. On any ordinary day, today’s German sentiment data would have been a reason for moderate optimism. Despite ongoing warnings and fears of a derailing of the global economy, the Eurozone’s largest economy is still going strongly. However, this is definitely and sadly not an ordinary day anymore.

The loss of innocence

Yesterday’s three regional elections all had their national and regional stories to tell. The only real common denominator in all three states is the rise of the Alternative for Germany (AfD). In the end, the results of the three regional elections in Germany told many stories and had many different outcomes. And in fact, all traditional parties had some painful defeats but also some encouraging results. Angela Merkel’s CDU, for example, suffered strong losses in Rhineland Palatinate, but remained relatively stable in Baden Wuerttemberg and Saxony-Anhalt. Depending on the upcoming coalition negotiations, Merkel’s CDU could still manage to enter the government in all three regional states (up to now, the CDU was only represented in one out of the three governments). At the same time, the social-democratic junior coalition partner in the federal government, the SPD, suffered painful defeats in Saxony-Anhalt and Baden-Wurttemberg, but gained in Rhineland-Palatinate and came in as the strongest party. Finally, the Green Party celebrated a unique victory in Baden-Wurttemberg, being the strongest party for the first time ever in a regional state, but at the same time recorded disappointing results in the other two states. Not surprisingly, the only party which could enjoy strong gains in all three states was the AfD; at least for the time being Germany’s new anti-euro, anti-immigration party. While the AfD came in at lower double-digit numbers in Rhineland-Palatinate (around 12%) and Baden-Wuerttemberg (around 15% of all votes), it gained almost 25% of all votes in Saxony-Anhalt. As indicated by earlier polls, around three-fourths of all AfD voters favour the party to voice their own protest rather than due to better expertise or political platforms. In the coming days, coalition negotiations in all three states will start. At the same time, national politicians will try to draw their lessons from the elections for national topics and politics. However, the latter will not be that easy as the election results actually only have one common denominator: the emergence of the populist AfD. Furthermore, other interpretations like the elections were a protest vote against Angela Merkel’s stance in the refugee crisis are too short-sighted. The fact that Merkel’s CDU remained relatively stable in two states and that in Rhineland-Palatinate and Baden-Wuerttemberg two politicians, who actually stood closer to Merkel in the refugee crisis than many in her own party, suggests that the regional votes were not only on Merkel. In our view, the elections showed a general trend towards protest votes against the established parties. All in all, yesterday’s election results will not significantly alter Merkel’s stance in the refugee crisis. In fact, Merkel – very silently and gradually – has already adjusted the stance towards more stricter asylum and immigration rules. The results were not strong and clear enough to give Merkel’s critics in her own party enough ammunition to seriously consider a coup. To the contrary, Merkel could eventually get stronger again in the coming weeks; also because one of her potential successors, the CDU’s candidate in Rhineland-Palatinate Julia Klöckner, lost an election for the second time. Unless Finance Minister Schaeuble stands up, backed by the more conservative part of the party, to challenge Merkel’s position, it is hard to see an adequate crown prince or crown princess; at least not for the federal elections next year. While her own party should become less of a problem in the coming months, Merkel will be facing two other big challenges, stemming from yesterday’s elections: a politically embattled junior coalition partner and a more general trend in German politics, the rise of populism. The rise of the AfD will give spin doctors and masterminds the biggest headache. The rise could eventually make coalition building after the 2017-election very complicated. It is a rise, which also shows that Germany has caught up with all other European countries: it has finally lost its immunity against populist parties.

Last hooray or new fireworks? ECB announces new stimulus package

It was not the white rabbit or the big game changer but it might have been another, maybe the last, coup of the ECB to revive growth in the Eurozone. At today’s meeting the ECB announced several measures which all aim at making financing conditions even more easier than they already were, while at the same time further trying to improve the transmission mechanism of the monetary policy. Here are the decisions in more detail: - The ECB cut interest rates by 5 and 10 basis points respectively. To be precise, the ECB lowered the refi rate to zero, from 0.05%, the deposit rate to -0.4%, from -0.3% and the marginal lending rate to 0.25% from 0.3%. - Monthly QE purchases will be increased from 60bn euro to 80bn euro. - To make higher QE purchases feasible, the ECB will include corporate bonds into the QE purchases and the threshold for purchases of bonds by international organizations and multilateral development banks will be increased from 33% to 50% per issuance. - A new series of four targeted longer-term refinancing operations (TLTRO) will be launched in in June this year. Banks will be able to get ECB money either at the refi rate (now zero) or even at the deposit rate (now -0.4%), depending on the banks’ lending books. These four big measures are supposed interact and gear into each other. Particularly, the reintroduction of the once less successful TLTROs is a clear alleviate the burden of negative rates for banks. For the first time ever, the ECB will pay banks for borrowing money; at least in case banks fulfil certain criteria. For the technicians, banks will be able to borrow up to 30% of the stock of eligible loans as at 31 January 2016. In general, banks can borrow at the refi rate but for banks, whose net lending exceeds a benchmark for lending growth, borrowing at the deposit rate will be possible. While this measure is clearly groundbreaking, it remains to be seen whether it will work. During the press conference, ECB president Draghi admitted that the ECB was “increasingly aware” of the negative impact of negative rates on banks but that this impact differed across the sector. Some banks were more vulnerable than others but the ECB had to look at the entire sector, not single banks. The ECB’s measures were clearly triggered by a significant downward revision of the inflation projections and continued fears of deflation or at least second-round effects from negative inflation rates. The ECB staff projections showed an expected sub-potential recovery of the Eurozone going into 2018, with GDP growth forecasted at 1.4% (from 1.7%) in 2016, 1.7% (from 1.9%) in 2017 and 1.8% in 2018. Risks are still tilted to the downside. As regards inflation, the ECB staff had to pay a tribute to the further drop in oil prices and the strengthening of the euro since the December forecasts. Here, ECB staff now expects inflation to come in at 0.1% (from 1.0%) this year, 1.3% (from 1.6%) in 2017 and 1.6% in 2018. It was this continued undershooting of the ECB’s inflation target as well as the ECB’s determination to never give up, as Mario Draghi said himself, which led to today’s set of new measures. In addition to the announced measures, the ECB gave a strong forward guidance, stressing that interest rates were not only to remain “at present or lower levels for an extended period of time” but also that rates would remain low “well past the horizon of [the ECB’s] net asses purchases”. In short, rate will remain low for the foreseeable future. All in all, the ECB delivered more than market participants had expected. Particularly the part in which the ECB will now under certain conditions actually pay banks for borrowing money came as a surprise. Still, the rebound of the euro exchange rate after comments by Draghi that the ECB could not cut rates as low as it wanted and that it doesn’t anticipate the need for further rate cuts indicates that betting on a weaker euro as the outcome of today’s meeting is risky. Instead, the ECB will hope that this time around the attempt to revive lending and thereby investment will finally work. It is a long shot with an uncertain outcome. We are hesitant to say that this was it. The ECB is clearly determined to continue fighting. Admitting impotence does not seem to be an option. Whether this fight, without support by governments and fiscal policies (the ECB actually gives a gentle nod to investment in public infrastructure), will really lead to a victory against stagnation and oil price driven low inflation rates remains doubtful. The next months will tell whether today was the igniter of a lasting fireworks or just the last hooray.

Column - Kanzler-in of Kanzler-raus?

Er broeit iets in Duitsland. Terwijl ik op de fiets op weg naar mijn werk in een Frankfurtse villawijk op het fietspad ‘Moslems raus’ zie staan, komt bondskanselier Merkel op tv haar beleid uitleggen. Normaal heel zuinig met tv-interviews, is dit Merkels tweede live-optreden in vijf maanden. Het maakt duidelijk dat de stormvlaggen in Berlijn gehesen zijn en dat men probeert schade te voorkomen. Dit is geen goedkope verkiezingstruc, maar een teken dat Merkel vecht voor haar politieke toekomst. Misschien te laat. Over ruim een week gaan de kiezers in drie Duitse deelstaten naar de stembus. Er kiezen 12,7 miljoen mensen nieuwe deelstaatregeringen. Zoals vaak bij Duitse regionale verkiezingen gaat het minder over regionale politiek en zijn de verkiezingen vooral een barometer voor de nationale politiek. Zeker nu, ruim een jaar voor de volgende nationale verkiezingen. Feitelijk staat er voor bondskanselier Merkel niet zo veel op het spel. Haar partij zit nu maar in één van de drie deelstaatregeringen. Vanuit de machtspolitiek is het neerwaartse risico dus beperkt. Maar het gaat om veel meer. De verkiezingen worden gezien als belangrijke graadmeter van Merkels vluchtelingenbeleid. Of dat beeld klopt of niet, maakt eigenlijk niet uit. Feit is dat de verkiezingen gevolgen zullen hebben. Voor de Duitse politiek in het algemeen en voor Angela Merkel in het bijzonder. Voor de Duitse politiek dreigt het einde van de voorspelbare republiek. De regionale verkiezingen, de opmars van de nationalistische Alternative für Deutschland en een mogelijk verder verlies van de sociaaldemocraten kunnen de opmaat zijn voor verdere verschuivingen in het Duitse politieke krachtenveld. Ook nationaal. Een verdere versplintering van het partijenstelsel. In het verleden was politiek in Duitsland redelijk simpel. Sociaaldemocraten of christendemocraten regeerden samen met hun natuurlijke juniorpartner: de liberalen, respectievelijk de groenen. En als dat niet mocht lukken, dan maar met elkaar in een grote coalitie. Als de opiniepeilingen uit de drie deelstaten kloppen, is dat verleden tijd. Coalities zullen uit minstens drie partijen bestaan, waarbij alle mogelijke combinaties worden opengehouden. Voor Merkel persoonlijk staat er veel op het spel. Haar tv-optreden toont dat zij, na haar Alleingang, eindelijk probeert breder begrip voor haar vluchtelingenbeleid te kweken. Het gevaar is echter dat dat te laat komt. Het rommelt in de coalitie met de SPD en in haar eigen partij. Ongenoegen dat alleen maar zal verdwijnen met grote overwinningen. En als de opiniepeilingen kloppen, ligt dat niet in het verschiet. Als Merkel politiek aan wil blijven, zullen we haar tot volgend jaar veel vaker live op de buis zien. Haar lot is min of meer verbonden aan het lot van de vluchtelingen: er in, of er uit. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

German Ifo takes a dive in February

Wake-up call. Global events have finally reached German companies’ boardrooms. At least this is one conclusion of today’s Ifo reading. Germany’s most prominent leading indicator, the just released Ifo index, dropped to 105.7 in February, from 107.3 in January; the third decline in a row and the lowest reading since January 2015. Particularly expectations have taken another sharp hit from recent market turmoil, the adverse impact of low oil prices and renewed concerns about a slowing of the Chinese economy, dropping to 98.8 in February, from 102.3 in January. Remarkably, the current assessment component increased to 112.9, from 112.5 in January, indicating that it is fear rather than an already felt decline which is troubling German companies. Earlier this morning, the German statistical office had released details of GDP growth in the final quarter of 2015. The data showed that growth was mainly driven by consumption, more from the public than the private sector, and the construction sector. Net exports had been a severe drag on growth, with (QoQ) exports actually dropping for the first time since 2012. Although looking positive at first glance, these GDP data are already telling a slightly less optimistic story about the German economy. Despite the strong labour market, low inflation, low oil prices and higher wages, private consumption growth slowed down in the final quarter. Back to today’s Ifo index. As so often in the past, even though they probably the most internationally-oriented companies in the world, it took German companies a while to realize that the world outside of Germany has changed. For a while, the cooling of the Chinese economy and the slowdown in emerging markets was more than offset by strong demand from the US and a rebound of activity in some Eurozone countries. Currently, however, as low oil prices are denting US growth prospects, the US economy could no longer be the strong safety net for German exports and industry that it was in 2015. As paradox as it might sound, low oil prices currently seem to do more harm than good to the German economy. All in all, today’s Ifo index sends a strong wake-up call to the German economy: the easy and carefree life on the island of happiness seems to come to an end. For the time being, solid domestic activity should avoid any real negative surprised. Growth on the back of the public sector, consumption and construction activity might shield the German economy from external headwinds, but is clearly not a strategy for sustainable growth in the medium run. Just ask the majority of Germany’s Eurozone peers.

Het heilige geloof

De Duitse kerken klagen over te weinig instroom. Van de minder dan 60 procent Duitsers die in een kerkregister zijn opgenomen, gaat slechts een fractie vaker dan alleen met Kerstmis en Pasen naar de kerk. Net als in veel andere landen is het belijden van het christelijke geloof tanende. Maar een ander geloof heeft nog altijd veel aanhangers in Duitsland. En het aantal dienaren groeit: het geloof in het recht.

Duitsland heeft anderhalf keer zo veel advocaten per inwoner als België, dubbel zo veel als Nederland en Zwitserland en drie keer zo veel als het eveneens Duitstalige Oostenrijk. En het aantal advocaten stijgt nog altijd. In Duitsland vallen op dit moment veel heilige huisjes, het vertrouwen in de autoindustrie en in het ‘schaffen’ van de immigratiegolf, maar het vertrouwen in het recht zal als laatste vallen.

In de korte tijd dat ik weer in mijn vaderland woon, heb ik onvrijwillig meerdere ervaringen met advocaten opgedaan. De plaats waar ik woon staat bekend om haar hoge advocatendichtheid. De stad durft nauwelijks een nieuw beleid te voeren omdat ze juridische procedures vreest. Speel- en sportpleinen zijn door klachten een groot deel van de dag verplicht dicht: de buurtbewoners ervaren geluidsoverlast. Heb je een probleem met je buurman, je vrouw of desnoods je hond? Voer dan zeker geen goed gesprek en zoek ook niet naar pragmatische oplossingen waar iedereen mee kan leven. Nee, haal er onmiddellijk een advocaat bij.

In praatprogramma’s wordt bij elke show een professor in het recht uitgenodigd om feiten te beoordelen en te duiden. De instantie van het allerlaatste woord in Duitsland is niet de regering, het parlement of Bundeskanzlerin Angela Merkel, maar het Constitutionele Hof in Karlsruhe. Politieke en economische kwesties worden door burgers of belangengroepen, ook na eenduidige beslissingen door de politiek, aan de rode rechters van het Bundesverfassungsgericht voorgelegd.

Dat patroon en de behoefde om koste wat kost gelijk te halen voor de rechter wordt deze week weer ad absurdum geëtaleerd. De rode rechters van Karlsruhe buigen zich over het OMT, het obligatieopkoopprogramma van de Europese Centrale Bank. Nee, niet het huidige programma van grootschalige opkopen van staatsobligaties - QE voor de kenners - maar het programma dat nooit werd uitgerold. Dat alleen op papier bestond.

Maar dat is niet alles. Het is ook het programma dat het Europees Hof als wetmatig beschouwt. Jammer dat veel Duitsers niet de humor hebben om het satirische element in dat toneelstuk te zien.

En zo kijkt Duitsland deze week weer doodserieus naar Karlsruhe. Wellicht ziet het Hof met het wankele Europese huis en de verzwakking van de Europese samenwerking nieuwe kansen? De kans is klein. Uiteindelijk moet Karlsruhe (en het Duitse volk) aanvaarden dat het Europese recht boven het Duitse staat. Een schok voor veel Duitsers, want na het geloof in de betrouwbaarheid van de Duitse auto valt daarmee het laatste heilige geloof.

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

 

 

German growth, new risks and Bayern Munich

Now it’s confirmed. The German economy ended the year with a decent growth performance in the final quarter. Despite increasing external headwinds, the German economy grew by 0.3%. This is slightly less than the first estimate for the annual growth number had suggested and probably the result of an entire batch of disappointing hard December data. Compared with the last quarter of 2014, the economy grew by 2.1%. Working-day adjusted, 4Q growth was 1.3% YoY. Details of 4Q GDP will only be published at the end of the month but available monthly indicators and the statistical office’s statement suggest that domestic demand was the main growth driver. Government consumption, a bit of private consumption and another surge in the construction sector supported growth, while at the same time net exports were a drag on growth. Without any doubt, the performance of the German economy since 2009 has been impressive. In 27 quarters, the economy only shrank three times. Moreover, over this period, the economy moved from a purely export-driven model towards a much more balanced model with domestic factors currently shielding the economy against external headwinds. Sadly, as impressive this well-known growth story might be, against the background of latest financial market turmoil, today’s German GDP data almost look like a relict of the good old days. They will do little to nothing to calm markets. Looking ahead, the year 2016 could be more challenging for the German economy than many had expected. Not only due to the refugee crisis and increasing political uncertainty but mainly due to increasing external headwinds. On top of the well-known risk factor like slowing China and emerging markets or a still struggling Eurozone, low oil prices and the possible weakness of the US economy could give the German economy a hard time. In particular, any slowdown of the US economy could turn out to be a double whammy for Germany. The direct impact through weaker demand from last year’s most important trading partner and the indirect impact through a stronger euro are in our view currently the biggest risks for the German economy. To some extent, there are similarities between Germany’s showcase soccer team Bayern Munich and the Eurozone’s showcase economy. At first glance, both performances look impressive and flawless. At second glance, however, weaknesses have emerged recently. These weaknesses have clearly increased the risk for both Bayern Munich and the German economy to surprisingly be knocked off their respective pedestals in the coming weeks and months. Carsten Brzeski

German industry disappoints in December

German industrial production dropped by a depressing 1.2% MoM in December, putting an end to a rather disappointing year for the German industry. This was the sharpest monthly drop since August 2014. On the year, industrial production was down by 2.2%. Looking at the details, there was only one bright spot in the production of intermediate goods (+0.8% MoM). All other sectors saw a decline in production. Parts of this December drop can be explained by the timing of the Christmas vacation which put parts of the production process on halt for almost two weeks in December. However, the fact that industrial production in the final quarter of the year was almost 1% lower than in the third quarter illustrates the general weakness of Germany’s former growth engine. At the same time, exports and imports both dropped by 1.6% MoM in December, narrowing the non-seasonally adjusted trade surplus to 18.8bn, from 20.5bn euro in November. December trade data show that German exporters have also started to suffer weaker foreign demand. Nevertheless, contrary to industrial production, the trade performance over the entire year 2015 was still positive. For most parts of the year, German exports benefitted from a weaker euro. Particularly, exports to the US have benefitted from the sharp depreciation of the euro since 2014. As a consequence, the US has become Germany’s most important trading partner in 2015, taking this number one spot from France. In this regard, renewed fears of a Chinese hard landing should not push the German economy into severe problems. Germany currently exports almost twice as much to the US as to China. Interestingly, help to offset weaker demand from emerging economies did not only come from overseas but also from next door. Exports to the Netherlands also increased strongly in 2015, making the Netherlands Germany’s third most important trading partners, taking both exports and imports together. All in all, this morning’s data were a painful reminder that not all is hunky dory in the Eurozone’s largest economy. In fact, the German “Wirtschaftswunder” has only some domestic magic left. With the strong labour market, low inflation, low interest rates and higher wages, consumption is strong and, in addition, services and the construction sector have become important growth drivers. The German industry, however, is still standing on shaky grounds. While the industry had been able to stomach the cooling of the Chinese economy, the slowdown of emerging markets, the euro crisis and geopolitical risks, it now seems as if extremely low oil prices and the slowdown of the US economy are simply two risks too much for the industry. Particularly, the possible US slowdown could turn out to be the biggest risk for the German economy as it could weaken the country’s most important export driver these days. Moreover, as capacity utilization in the industry is close to historical averages, an imminent investment boost also seems far from certain. Finally, last week’s new orders data combined with dropped product expectations, increased inventories and narrowed order books all do not bode well for industrial production in the coming months.

ECB meeting - It ain't over till it's over

What was expected to be a dull first meeting of the year, turned out to be an exciting ECB meeting with ECB president Mario Draghi opening the door widely for new ECB action in March. While today’s ECB meeting will again feed bold speculations about what could happen in March, the question remains whether Draghi will really be able to deliver on his promise. No action today but probably in March. This is the bottom line of today’s ECB meeting. Interest rates and all else were kept on hold. However, ECB president Draghi sounded much more concerned about the outlook for the Eurozone economy, both in terms of growth and inflation, than six weeks ago. Draghi explicitly mentioned the renewed sharp drop in oil prices, the appreciation of the euro (let’s not forget, the side-effect of Draghi’s monetary policy own goal in December) and the slowdown of emerging markets and China. In addition, Draghi mentioned the volatility in financial and commodity markets as one of the factors behind the increase in downside risks since the start of the new year. Against this background, Draghi sent several strong messages, hinting at new ECB action at the next ECB meeting. First of all, Draghi reintroduced the concept of explicit forward guidance by stating that “we expect them [key ECB interest rates] to remain at present or lower levels for an extended period of time”. In our view a clear indication that despite having announced the lower bound for interest rates several times of the last years, the ECB is again considering cutting rates. Moreover, an even stronger hint at new action was given with the sentence “it will therefore be necessary to review and possible reconsider our monetary policy stance at our next meeting in early March”. According to Draghi, “work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed”. A bit of a surprise as we thought that all possible options had already been on the table back in December. Financial markets reacted enthusiastically to Draghi’s hints and the euro exchange rate dropped immediately. The question, however, is whether and what the ECB can really deliver in March. Let’s not forget that the outcome of the December meeting looked like a compromise between doves and hawks, with the ECB eventually delivering less than markets had expected. Admittedly, at least the external environment for the Eurozone economy has worsened since the December meeting but it is unclear what the ECB can do to tackle low prices. It is hard to imagine that oil purchases will be on the agenda in March. Nevertheless, unless oil prices rebound in the coming weeks or the Eurozone economy surprises to the upside, it will again be difficult for the ECB not to deliver with new action in March. Judging from today’s comments, the most likely common denominator for both hawks and doves should be another rate cut (perhaps the idea of a two-tier deposit rate will be dug out again), possibly combined by another marginal fine-tuning of QE. All in all, today’s ECB meeting shows that Mario Draghi is always in for a good surprise. Every time it looked as if the ECB was done with its stimulus and willing to wait until all measures have had enough time to unfold their full impact, Draghi puts another log on the fire. Even if the big question remains whether Draghi can actually make markets’ new dreams come true. We might not hear Draghi sing at a press conference but for now Draghi has today again reminded everyone that “it ain’t over till it’s over”.

Solid recovery continues: German GDP grew 1.5% in 2015

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.5% in 2015 (in calendar-adjusted terms), from 1.6% in 2014. Without working day adjustments, German GDP increased by 1.7%, from 1.6%. In our view, this outcome suggests that the German economy has probably grown by some 0.4% QoQ in the fourth quarter. However, as no hard data for December has been available so far and the statistical office normal uses extrapolations and historical patterns for its fourth quarter estimates, some downward revisions cannot be excluded. Let’s not forget that the vacation period could have had a negative impact on production in December. Moreover, the statistical office also released a first estimate of Germany’s 2015 fiscal balance, providing more arguments for the critics of too weak German public investment. For the first time since 1961, the German government recorded a fiscal surplus in two consecutive years. According to the statistical office, the fiscal surplus came in at 0.5% of GDP in 2015, from 0.6% GDP in 2014. German austerity fetishists will love it. Already yesterday, the German government reported a federal fiscal surplus, which at the federal level came in at 12bn euro, instead of the initially planned 5bn euro. Previously, the government coalition had already decided to transfer any surplus from the 2015 budget entirely into the 2016 budget and not using the surplus to reduce government debt. The funds are needed to finance the costs of the refugee inflow, which the government has currently estimated at around 8bn euro. The reported surplus now offers additional financing leeway for another 7bn euro. While initially this additional fiscal room for maneuver will be used as a buffer for the refugee costs, it is obviously also grist to the mills of proponents for more public investment. Returning to GDP data, today’s numbers almost close the economic year 2015 for Germany. It was yet another year in which the German economy defied earlier swan songs and, despite many headwinds like the Greek crisis, the slowdown in emerging markets and China and increased geopolitical uncertainties, continued the recovery. The year 2015 clearly marks an important step in the rebalancing of the German economy, as private consumption turned out to be an important growth driver (contributing 1.0 percentage points to growth). Still, despite all talks about the strength of the German economy, it took until 2015 before the current expansion has finally become stronger than the last one between 2004 and 2008. Moreover, it would still need at least two more solid years of growth before the cycle between 1994 and 2000 could be equaled. Looking ahead, the two-speeded recovery, with strong consumption and services on the one hand and sluggish industrial production and exports on the other hand, should continue in 2016. As regards the domestic part of the economy, the year 2016 should bring at least a short-term consumptive stimulus from the refugee inflow and increased government consumption. At the same time, low interest rates, low inflation and high employment should further boost growth. As regards the external and industrial part of the economy, high inventories, subdued order books and weaknesses in several important export markets suggest that the German export sector could soon simply face too many headwinds to prolong the recent success story. All in all, the German economy has once again defied many external headwinds and performed another solid growth year in 2015. However, there are at least two caveats to today’s positive data: firstly, after several years of stellar performances (at least vis-à-vis the rest of the Eurozone), the German economy has returned to normality, hardly outperforming the Eurozone any longer. And secondly, without any new structural reforms and investments it is hard to see any sharp acceleration of the economy any time soon. This might be as good as it gets. Therefore, any celebrations and self-adulations should remain extremely modest.

German IP disappoints in November

This morning’s trade and production data end an almost all-German week in the Eurozone, in which macro-economic data have almost been overshadowed by the mass assaults in several bigger German cities on New Year’s Eve. While the latter could, in our view, mark a turning point in Chancellor Merkel’s handling of the refugee influx, macro data shows a two-speeded economy with strong domestic demand but rather sluggish industrial and export activity. Turning to this morning’s data, industrial production dropped in November by 0.3% MoM, adding to evidence that the Chinese and emerging market slowdowns are leaving their marks on the Eurozone’s largest economy. Moreover, these weak data add to concerns that hard data will not be able to catch up with optimistic sentiment indicators. On the year, industrial production remained unchanged. Looking at the details, bright spots were in the production of intermediate (+1.1% MoM) and consumer goods (+1.9% MoM). The construction sector benefitted from the mild weather in November and increased by 1.6% MoM. At the same time, exports increased by 0.4% MoM in November, while imports increased by 1.6% MoM. As a consequence, the trade balance narrowed to 20.6bn euro, from 22.5bn euro in October. It is not easy to find a common theme for latest German data. While consumption remains solid, on the back of the strong labour market, low inflation and low interest rates, latest developments are still far from creating exuberance. At the same time, industrial production is treading water and the current slowdown is clearly more than only the result of a vacation-driven summer lull. Looking ahead, ongoing uncertainties in China, a possible slowdown in the US economy and more generally the negative effects from record-low oil prices a quick rebound in industrial production is anything but certain. To the contrary, in our view, industrial activity should continue to remain sluggish this year. However, this does not necessarily have to be a problem. In fact, Germany seems to experience the same phenomenon as for example the US and Chinese economy: a shift from manufacturing towards services. In Germany, this has been illustrated by the Ifo index for individual sectors. While the manufacturing sector has been treading water throughout the year and weakened in recent months, the construction, retail and wholesale sectors have been driving the strong Ifo index performance in recent months. Another piece of evidence that the German economy is currently mainly driven by domestic factors. Moreover, the fact that the Ifo index for the service sector has recently climbed to its highest level since early 2005, provides further evidence for the decoupling of manufacturing and services. As regards exports, German exporters are still benefitting from the weak euro. Particularly, exports to the US have benefitted from the sharp depreciation of the euro since 2014. As a consequence, the US has been Germany’s most important trading partner this year, taking this number one spot from France. In this regard, renewed fears of a Chinese hard landing should not push the German economy into severe problems. Germany currently exports almost twice as much to the US as to China. However, as it is not only the Chinese economy which is slowing down but also other emerging markets, while at the same time Eurozone peers are still struggling to gain momentum and oil-exporting countries are suffering from low energy prices, the German export sector could soon simply face too many headwinds to prolong the recent success story. Next week, the German statistical office will continue its long tradition of releasing GDP data for the entire year without having any hard macro data for December. The latest batch of November data suggests a continuation of the recovery in the fourth quarter, albeit at a rather subdued pace. However, in the light of the latest market turmoil, continued concerns about the Chinese economy, extremely low oil prices and the absence of dynamic growth regions in the world economy, any shouts of joy about strong German growth should better remain humble. Carsten Brzeski

Encouraging data from Germany

Signs of relief. This morning’s German data provides some relief and signs of stabilization of the economy in the final quarter of the year. Particularly the surprise increase of new orders in November bodes well for the coming months. After a disappointing summer performance, German new orders increased for the second month in a row, now by 1.5% MoM in November, from 1.7% MoM in October. For the pessimists, the increase in new orders was mainly driven by domestic demand (2.6%). This shift of the German economy towards more domestic activity is probably the theme of 2015. On the year, domestic new orders are now up by more than 6%, while foreign orders are down by 0.7%. Moreover, this morning’s retail sales data supports strengthened domestic demand, showing an increase of 0.2% MoM in November. On the year, retail sales are up by 2.3%. This morning’s data has at least two important messages for and on the German economy: i) there is still hope that hard industrial data will eventually catch up with strong soft data (and the other way around); and ii) with record low inflation, record high employment, record low unemployment, strong consumption and the surge in domestic orders, the year 2015 marks the successful transition towards more balanced growth.