Autsch. Den Aufschrei aus dem Pariser Elysee-Palast konnte man bis nach Brüssel hören. Der Verlust des AAA Ratings der Grande Nation hat Präsident Sarkozy in Mark und Bein getroffen. Seit dem Anfang der Schuldenkrise 2010 hatte Sarkozy das AAA Rating für sein Land unermüdlich zur Chefsache erklärt. Knapp 100 Tage vor den französischen Präsidentschaftswahlen hat die Politik großer Worte und kleiner Taten ausgedient.
Nicolas Sarkozy gibt gerne den großen Staatsmann. Für Frankreich und für Europa. Während er versucht zusammen mit Angela Merkel den Euro zu retten, ist ihm wohl leider entgangen, dass sich seine eigene Volkswirtschaft so langsam aus der Europäischen Königsklasse verabschiedet hat. Das Wirtschaftswachstum hinkt dem deutschen seit Jahren hinterher, die Arbeitslosigkeit steht bei 10%, französische Exporteure haben schwer an internationaler Wettbewerbsfähigkeit eingebüßt und das Haushaltsdefizit ist so hoch wie im Problemland Portugal.
Wirtschaftlich begegnet man dem großen Nachbarn und Freund im Osten schon länger nicht mehr auf Augenhöhe. Mit dem Verlust des AAA Ratings wird das jetzt auch politisch schwieriger. Erst mutierte das europäische Traumduo von „Sarkel“ zu „Merkozy“, jetzt könnte Angela Merkel ganz alleine stehen.
Bleibt eigentlich nur die Flucht nach vorne. Endlich den Reformstau auflösen, den eigenen Haushalt wieder auf Vordermann bringen und dann als großer Macher die Wahlen gewinnen. So dachte wohl auch der französische Präsident. Was Sarkozy diese Woche allerdings als großes Reformpaket präsentierte war alles andere als ein Durchbruch. Mit einem Paket von 440 Millionen euro (sage-und-schreibe 0.02% vom französischen BIP) soll der Arbeitsmarkt stimuliert werden. Mini-Stimulus statt Einsparungen. Das wird nicht reichen.
Wenn Frankreich zurückkehren will in die Europäische Champions League wird es Zeit für einen Strategiewechsel: kleine Worte und große Taten.
Dieser "Letter from Brussels" erschien letzte Woche in der deutschen "Euro am Sonntag"
Monday, January 23, 2012
Wednesday, January 18, 2012
German ZEW continues rebound
Leaving the bottom behind? The German ZEW index increased in January, for the second months in a row. The ZEW index, which measures investors' confidence now stands at -21.6, a huge increase from -53.8 in December. At the same time, the current assessment component continued its recent rebound, increasing to 28.4, from 26.8.
It is almost official that the impressive German recovery came to a halt in the last quarter of 2011 when the economy finally started to feel the pain of the Eurozone debt crisis. There is a wide-spread fear that, similar to 2008, the German economy could now also follow the downward trend of its Eurozone peers, only with a lag. Austerity measures in almost all other Eurozone countries should also take their toll on the German economy. However, this is not 2008. Compared with early 2008, the labour market is stronger, consumers look more optimistic and corporate seem better prepared to weather a storm. At the same time, the safety new of low inventories and high backlog orders has become thinner over the last two months.
In addition to probably the soundest economic fundamentals of all big Eurozone countries, the German economy should actually again benefit from the Eurozone debt crisis in the coming weeks and months. With more than 60% of all exports going into non-Eurozone countries, Germany is amongst the main beneficiaries of the recent euro weakness. Moreover, the latest downgrades of nine Eurozone countries have rather strengthened than weakened Germany’s safe have role, keeping government bond yields at record lows. Even if the EFSF’s downgrade has theoretically increased the risk that Germany’s guarantees might eventually be used, the total amount of 16bn euro issued so far for Ireland and Portugal is too small to seriously be concerned.
Of course, the debt crisis has covered the outlook for the German economy with a veil of uncertainty. However, today’s ZEW reading adds evidence that the trough of negativity might be behind. With sound fundamentals and positive side effects from the crisis, Germany is one of the few Eurozone countries where the glass is currently rather half-full and not three-quarter empty.
It is almost official that the impressive German recovery came to a halt in the last quarter of 2011 when the economy finally started to feel the pain of the Eurozone debt crisis. There is a wide-spread fear that, similar to 2008, the German economy could now also follow the downward trend of its Eurozone peers, only with a lag. Austerity measures in almost all other Eurozone countries should also take their toll on the German economy. However, this is not 2008. Compared with early 2008, the labour market is stronger, consumers look more optimistic and corporate seem better prepared to weather a storm. At the same time, the safety new of low inventories and high backlog orders has become thinner over the last two months.
In addition to probably the soundest economic fundamentals of all big Eurozone countries, the German economy should actually again benefit from the Eurozone debt crisis in the coming weeks and months. With more than 60% of all exports going into non-Eurozone countries, Germany is amongst the main beneficiaries of the recent euro weakness. Moreover, the latest downgrades of nine Eurozone countries have rather strengthened than weakened Germany’s safe have role, keeping government bond yields at record lows. Even if the EFSF’s downgrade has theoretically increased the risk that Germany’s guarantees might eventually be used, the total amount of 16bn euro issued so far for Ireland and Portugal is too small to seriously be concerned.
Of course, the debt crisis has covered the outlook for the German economy with a veil of uncertainty. However, today’s ZEW reading adds evidence that the trough of negativity might be behind. With sound fundamentals and positive side effects from the crisis, Germany is one of the few Eurozone countries where the glass is currently rather half-full and not three-quarter empty.
Thursday, January 12, 2012
ECB takes a breather
After two consecutive rate cuts in November and December, the ECB today kept interest rates unchanged. In the Q&A session after the meeting, ECB president Draghi left the door open for further rate cuts.
The ECB’s macro-economic assessment was an almost verbatim copy of last month’s assessment. As regards growth, the ECB still sees substantial downside risks, mostly stemming from the debt crisis and financial market tensions. At the same time, the only new element of the macro assessment was the ECB’s observation that there were first tentative signs of “a stabilisation at a very weak level”. As regards inflation, risks to the medium-term outlook remain balanced. The ECB still expects headline inflation to stay above 2% for several months, before dropping below 2%. All in all, the ECB’s macro assessment confirmed the impression of the last two months, namely that at the current juncture the ECB’s main focus is on growth, not on inflation.
Even if ECB president Draghi pointed to the first tentative signs of stabilisation at a low level, the door for further rate cuts was opened. Contrary to the last two hiking cycles, the ECB has never used code words to pre-announce rate cuts. However, it might be more than pure coincidence that the only really new phrase in the first paragraph of the introductory statement “a very thorough analysis of all incoming data and developments over the period ahead is warranted” was exactly the same sentence used by his predecessor Trichet at the October meeting. And there was more. Draghi declined to label the 1% level a floor for ECB rates and also stressed that the ECB stood ready to act. All in all, still high inflation and tentative signs of a stopping of the growth deterioration have motivated the ECB’s current wait-and-see stance. As soon as the Eurozone economy slips further, a next rate cut looks highly probable. Further rate cuts are clearly growth-dependent.
On all other issues like the Eurozone debt crisis, bond purchases, PSI in Greece, non-standard measures and Hungary, Mario Draghi mastered his first challenges of talking without telling anything new rather well. He reitereated the ECB’s criticism of the PSI but refrained from giving any advice on the negotiations in Greece.
After a helter-skelter start of his ECB presidency with two rate cuts within two months, Mario Draghi could today finally enjoy a rather uneventful press conference. The ECB has taken a breather. With the main interest rate at 1% and the enormous liquidity measures, the ECB remains ahead of the curve and still has room to react if need be. No doubt, the ECB will not hesitate to use it.
The ECB’s macro-economic assessment was an almost verbatim copy of last month’s assessment. As regards growth, the ECB still sees substantial downside risks, mostly stemming from the debt crisis and financial market tensions. At the same time, the only new element of the macro assessment was the ECB’s observation that there were first tentative signs of “a stabilisation at a very weak level”. As regards inflation, risks to the medium-term outlook remain balanced. The ECB still expects headline inflation to stay above 2% for several months, before dropping below 2%. All in all, the ECB’s macro assessment confirmed the impression of the last two months, namely that at the current juncture the ECB’s main focus is on growth, not on inflation.
Even if ECB president Draghi pointed to the first tentative signs of stabilisation at a low level, the door for further rate cuts was opened. Contrary to the last two hiking cycles, the ECB has never used code words to pre-announce rate cuts. However, it might be more than pure coincidence that the only really new phrase in the first paragraph of the introductory statement “a very thorough analysis of all incoming data and developments over the period ahead is warranted” was exactly the same sentence used by his predecessor Trichet at the October meeting. And there was more. Draghi declined to label the 1% level a floor for ECB rates and also stressed that the ECB stood ready to act. All in all, still high inflation and tentative signs of a stopping of the growth deterioration have motivated the ECB’s current wait-and-see stance. As soon as the Eurozone economy slips further, a next rate cut looks highly probable. Further rate cuts are clearly growth-dependent.
On all other issues like the Eurozone debt crisis, bond purchases, PSI in Greece, non-standard measures and Hungary, Mario Draghi mastered his first challenges of talking without telling anything new rather well. He reitereated the ECB’s criticism of the PSI but refrained from giving any advice on the negotiations in Greece.
After a helter-skelter start of his ECB presidency with two rate cuts within two months, Mario Draghi could today finally enjoy a rather uneventful press conference. The ECB has taken a breather. With the main interest rate at 1% and the enormous liquidity measures, the ECB remains ahead of the curve and still has room to react if need be. No doubt, the ECB will not hesitate to use it.
Wednesday, January 11, 2012
Koning van Duitsland
Duitsers houden van blauw bloed. Geen tabloid zonder koninklijke verhalen, en grote koninklijke huwelijken halen op televisie bijna net zo hoge kijkcijfers als wedstrijden van Die Mannschaft.
Er sluimert bij grote delen van de Duitse bevolking een grote hang naar adel en glamour. Eerst was de aandacht en idolatrie gericht op het echte en dubbele blauwe bloed van Freiherr Karl-Theodor von und zu Guttenberg met zijn uit een politiek historisch geslacht stammende mooie vrouw gravin Stephanie Von Bismarck Na zijn val moest de behoefte aan glamour aan de top elders ingevuld worden. Als dat niet met de echte adel kan, dan maar met wat anders. Bondspresident Christian Wulff met zijn jonge vrouw was dankbaar voer voor de boulevardpers. Na veel aandacht voor 'romantische buitenlandse reizen' van de bondspresident, was de liefde met de pers uit na enkele kritische vragen. Met dank aan een goedkope lening van de vrouw van een bevriende ondernemer voor een burgerlijk eengezinswoninkje, dreigementen tegen 's lands grootste mediamacht Bild-Zeitung en een op zijn zachtst gezegd onhandig communicatiebeleid, heeft Wulff de eurocrisis voor enkele weken met vakantie gestuurd.
Wulff-aanhanger of niet, de voorbije weken hebben weer eens duidelijk gemaakt hoe moeilijk de positie van bondspresident is. Op papier is hij de hoogste politieke figuur in Duitsland, maar in de werkelijkheid is hij slechts een ceremoniële lintjesknipper.
De zwakke positie gaat terug op de ervaringen uit de Weimarrepubliek. Toen had de rijkspresident het recht de wensen van het parlement te negeren en zelf een kanselier te benoemen. De rol van onaantastbaar regent die vooral rijkspresident Paul van Hindenburg zichzelf toen aanmat, wordt vaak beschouwd als een mede-oorzaak voor het ontstaan van het Derde Rijk. In feite is de bondspresident dus de anti-Hindenburg. De bondspresident in het hedendaagse Duitsland kan gezag alleen uitoefenen met richtinggevende speeches en integer optreden. Bij Wulff heerst sinds zijn aantreden radiostilte. Dit is niet alleen Wulff te verwijten, maar vooral Angela Merkel, die geen kritiek wil op haar beleid van de man die zij zelf de baan bezorgde. Duitsland was altijd al een kanseliersrepubliek en geen presidentiële republiek, maar de huidige crisis heeft de positie van bondspresident nog verder uitgehold.
Handjes schudden, vastgoedschandalen, boulevardblaadjes en de foute vrienden. In andere landen heb je daar soms koninklijke families voor. InDuitsland een constitutionele lintjesknipper, een koning zonder kroon. Misschien is het gewoon weer tijd voor een koning van Duitsland.
Deze column verscheen vandaag in het Belgische dagblad De Tijd
Er sluimert bij grote delen van de Duitse bevolking een grote hang naar adel en glamour. Eerst was de aandacht en idolatrie gericht op het echte en dubbele blauwe bloed van Freiherr Karl-Theodor von und zu Guttenberg met zijn uit een politiek historisch geslacht stammende mooie vrouw gravin Stephanie Von Bismarck Na zijn val moest de behoefte aan glamour aan de top elders ingevuld worden. Als dat niet met de echte adel kan, dan maar met wat anders. Bondspresident Christian Wulff met zijn jonge vrouw was dankbaar voer voor de boulevardpers. Na veel aandacht voor 'romantische buitenlandse reizen' van de bondspresident, was de liefde met de pers uit na enkele kritische vragen. Met dank aan een goedkope lening van de vrouw van een bevriende ondernemer voor een burgerlijk eengezinswoninkje, dreigementen tegen 's lands grootste mediamacht Bild-Zeitung en een op zijn zachtst gezegd onhandig communicatiebeleid, heeft Wulff de eurocrisis voor enkele weken met vakantie gestuurd.
Wulff-aanhanger of niet, de voorbije weken hebben weer eens duidelijk gemaakt hoe moeilijk de positie van bondspresident is. Op papier is hij de hoogste politieke figuur in Duitsland, maar in de werkelijkheid is hij slechts een ceremoniële lintjesknipper.
De zwakke positie gaat terug op de ervaringen uit de Weimarrepubliek. Toen had de rijkspresident het recht de wensen van het parlement te negeren en zelf een kanselier te benoemen. De rol van onaantastbaar regent die vooral rijkspresident Paul van Hindenburg zichzelf toen aanmat, wordt vaak beschouwd als een mede-oorzaak voor het ontstaan van het Derde Rijk. In feite is de bondspresident dus de anti-Hindenburg. De bondspresident in het hedendaagse Duitsland kan gezag alleen uitoefenen met richtinggevende speeches en integer optreden. Bij Wulff heerst sinds zijn aantreden radiostilte. Dit is niet alleen Wulff te verwijten, maar vooral Angela Merkel, die geen kritiek wil op haar beleid van de man die zij zelf de baan bezorgde. Duitsland was altijd al een kanseliersrepubliek en geen presidentiële republiek, maar de huidige crisis heeft de positie van bondspresident nog verder uitgehold.
Handjes schudden, vastgoedschandalen, boulevardblaadjes en de foute vrienden. In andere landen heb je daar soms koninklijke families voor. InDuitsland een constitutionele lintjesknipper, een koning zonder kroon. Misschien is het gewoon weer tijd voor een koning van Duitsland.
Deze column verscheen vandaag in het Belgische dagblad De Tijd
Monday, January 9, 2012
German economy cooling but without falling into cold rigour
Growth pause. German industrial production dropped by 0.6% MoM in November, from an 0.8% increase in October. On the year, industrial production is up by 3.6%. The drop was almost equally spread across all sectors. Only activity in the construction sector continued its upward trend and increased by 4.5% MoM, from 1.6% MoM in October.
Earlier today, German exports staged a strong comeback, increasing by 2.5% MoM in November. At the same time, imports dropped by 0.4% MoM, widening the seasonally-adjusted trade surplus to 15 bn euro, from 12.5 bn in October. The weaker euro and the unexpected economic improvement in the US has clearly benefitted German exporters.
Taken together, this morning’s data send a strong signal that the Eurozone’s biggest economy has probably shrunk in the final quarter of 2011. Only strong private consumption or an unexpectedly sharp rebound of industrial activity in December could prevent a slight drop of the German GDP. However, a quarter with negative growth might look like a recession but will definitely not feel like one.
Looking ahead, external demand from outside the Eurozone, with the US and Asia providing some positive news recently, and solid domestic demand have made the German economy the last stronghold of a rapidly weakening Eurozone. Nevertheless, the German economy might sometimes look like an island of happiness but it definitely is not an economic island. In the coming weeks and months, there are at least three major risks for the German economy. Obviously, the Eurozone debt crisis is one of these risks. Last developments were a good reminder that the crisis is not over but has rather already entered the next round with more Summits of Truth to come. Moreover, ongoing tensions on the interbank market, balance sheet deleveraging and higher capital requirements for banks have increased the risk of a credit crunch. Don’t forget that the backbone of the German economy, the famous Mittelstand (SMEs), is still highly dependent on bank financing, even if many companies have built up cash reserved over the last two years. Finally, as in the last two years, there is the big unknown: the winter weather. It never touches the economic fundamentals but can easily lead to high volatility.
Today’s numbers show that the German economy is cooling and will probably experience the first shrinking of the economy since the first quarter of 2009. However, it is cooling without falling into a cold rigor.
Earlier today, German exports staged a strong comeback, increasing by 2.5% MoM in November. At the same time, imports dropped by 0.4% MoM, widening the seasonally-adjusted trade surplus to 15 bn euro, from 12.5 bn in October. The weaker euro and the unexpected economic improvement in the US has clearly benefitted German exporters.
Taken together, this morning’s data send a strong signal that the Eurozone’s biggest economy has probably shrunk in the final quarter of 2011. Only strong private consumption or an unexpectedly sharp rebound of industrial activity in December could prevent a slight drop of the German GDP. However, a quarter with negative growth might look like a recession but will definitely not feel like one.
Looking ahead, external demand from outside the Eurozone, with the US and Asia providing some positive news recently, and solid domestic demand have made the German economy the last stronghold of a rapidly weakening Eurozone. Nevertheless, the German economy might sometimes look like an island of happiness but it definitely is not an economic island. In the coming weeks and months, there are at least three major risks for the German economy. Obviously, the Eurozone debt crisis is one of these risks. Last developments were a good reminder that the crisis is not over but has rather already entered the next round with more Summits of Truth to come. Moreover, ongoing tensions on the interbank market, balance sheet deleveraging and higher capital requirements for banks have increased the risk of a credit crunch. Don’t forget that the backbone of the German economy, the famous Mittelstand (SMEs), is still highly dependent on bank financing, even if many companies have built up cash reserved over the last two years. Finally, as in the last two years, there is the big unknown: the winter weather. It never touches the economic fundamentals but can easily lead to high volatility.
Today’s numbers show that the German economy is cooling and will probably experience the first shrinking of the economy since the first quarter of 2009. However, it is cooling without falling into a cold rigor.
Tuesday, December 20, 2011
Faltering but not falling
German Economic Quarterly 1Q12
The debt crisis has finally reached the German economy. Strong fundamentals, however, should prevent the economy from falling off the cliff.
The German economy was one of the last strongholds of the Eurozone in the third quarter. The economy grew by 0.5% QoQ, from 0.3% QoQ in 2Q. Compared with 3Q 2010, the economy grew by 2.6%. Interestingly, growth was much more balanced than expected, with private consumption being the main growth driver. Remarkably, often despised private consumption has actually grown in six out of the last seven quarters. Even if the growth performance is still dwarfed by the impressive export sector, private consumption has almost unnoticed become an important growth driver of the German economy.
With the latest stage of the Eurozone debt crisis and fiscal problems in France and Italy, two important German trading partners, concerns about the strength of the German economy have increased. The strong third quarter defied these concerns for the time being but the continued drop of confidence indicators has not been boding well for the future. Again, looking ahead, the one-million-dollar question is whether the last stronghold of the Eurozone will also give in, eventually pushing the entire Eurozone into a recession?
Without any doubt, the German economy is cooling off. And indeed, there are at least three major risks for the German economy in the coming months. Obviously, the Eurozone debt crisis comes in at top of potential risks. With bigger trading partners having to engage in austerity measures, external demand looks set to weaken. Don?t forget that France is Germany?s single most important trading partner, accounting for roughly 10% of all German exports. Second, a further drop in sentiment, particularly by just recently awakened consumers, could lead to a significant loss of momentum. With external demand weakening, stable domestic demand will be crucial. Finally, bank recapitalisations and restructurings could lead to a credit crunch in the coming months. According to the last bank stress tests, the two biggest German banks, Deutsche Bank and Commerzbank, have to raise more capital than previously estimated. In total, German banks will have to raise 13bn euro, instead of 5bn euro to raise their Tier1 capital ratios to the required 9% by next year.
However, even at the risk of sounding like a lay preacher, repeating the same old story over and over again, the fundamentals of the German economy are still sound and while there are three major risks, there are at least six arguments in favour of strong fundamentals: i) the absolute levels of most confidence indicators are still above recessionary levels and some indicators even rebounded recently; ii) a further stabilization of the US economy could at least to some extent offset weakening Eurozone demand as the US, not China, was the most dynamic export destination for German manufacturers since the beginning of the year; iii) latest lending data do not confirm any credit crunch concerns, yet. In fact, credit to the private sector has actually increased over the last couple of months; iv) German companies are benefitting from low interest rates as the high dispersion of bond yields across the Eurozone is also reflected in bank interest rates; v) the strong labour market is supporting domestic demand and the lack of qualified workers should prevent unemployment from rising, even if growth was to deteriorate more than expected; vi) finally, the high backlogs of companies and low inventories put a strong safety net under the economy.
If all else fails, the German economy still has fiscal stimulus as the final trump card to cushion a worse-than-expected slowdown. At least as regards fiscal balances, the German government has become a model student of the Eurozone class. Strong economic growth of the last two years has created significant revenue windfalls, lowering the fiscal deficit to around 1.5% this year and close to 1% next year. Moreover, German public finances are also benefitting from the sovereign debt crisis. The safe-haven effect on German government bonds has provided a net profit of around 9bn euro to the German government.
Interestingly, in cyclically-adjusted terms, Germany will be close to fulfilling the new European debt-break rules in the next two years. Against this background of a favourable fiscal outlook, the German government agreed on a tax relief of around 8bn euro (0.3% of GDP) for 2013. Obviously, there would be room for more, particularly given the fact that the next federal elections will be held in late-2013.
At the end of 2011, the German economy is finally feeling the strong headwind from the Eurozone debt crisis. The German export-dependence is again showing its ugly face. It would need an unexpected consumption or production boom in the last two months of the year to prevent negative growth in the fourth quarter. In fact, the impressive growth rally with ten consecutive quarters with strong GDP growth has come to an abrupt end. At the current juncture, however, German fundamentals look too sound to fear a spreading of weak exports into other sectors of the German economy. Contrary to 2008, the economy should not fall off a cliff but rather re-emerge after a soft patch. The length of the soft patch will to a large extent be determined by the management of the debt crisis. The German economy should remain the stronghold of the Eurozone. It is faltering, but not falling.
The debt crisis has finally reached the German economy. Strong fundamentals, however, should prevent the economy from falling off the cliff.
The German economy was one of the last strongholds of the Eurozone in the third quarter. The economy grew by 0.5% QoQ, from 0.3% QoQ in 2Q. Compared with 3Q 2010, the economy grew by 2.6%. Interestingly, growth was much more balanced than expected, with private consumption being the main growth driver. Remarkably, often despised private consumption has actually grown in six out of the last seven quarters. Even if the growth performance is still dwarfed by the impressive export sector, private consumption has almost unnoticed become an important growth driver of the German economy.
With the latest stage of the Eurozone debt crisis and fiscal problems in France and Italy, two important German trading partners, concerns about the strength of the German economy have increased. The strong third quarter defied these concerns for the time being but the continued drop of confidence indicators has not been boding well for the future. Again, looking ahead, the one-million-dollar question is whether the last stronghold of the Eurozone will also give in, eventually pushing the entire Eurozone into a recession?
Without any doubt, the German economy is cooling off. And indeed, there are at least three major risks for the German economy in the coming months. Obviously, the Eurozone debt crisis comes in at top of potential risks. With bigger trading partners having to engage in austerity measures, external demand looks set to weaken. Don?t forget that France is Germany?s single most important trading partner, accounting for roughly 10% of all German exports. Second, a further drop in sentiment, particularly by just recently awakened consumers, could lead to a significant loss of momentum. With external demand weakening, stable domestic demand will be crucial. Finally, bank recapitalisations and restructurings could lead to a credit crunch in the coming months. According to the last bank stress tests, the two biggest German banks, Deutsche Bank and Commerzbank, have to raise more capital than previously estimated. In total, German banks will have to raise 13bn euro, instead of 5bn euro to raise their Tier1 capital ratios to the required 9% by next year.
However, even at the risk of sounding like a lay preacher, repeating the same old story over and over again, the fundamentals of the German economy are still sound and while there are three major risks, there are at least six arguments in favour of strong fundamentals: i) the absolute levels of most confidence indicators are still above recessionary levels and some indicators even rebounded recently; ii) a further stabilization of the US economy could at least to some extent offset weakening Eurozone demand as the US, not China, was the most dynamic export destination for German manufacturers since the beginning of the year; iii) latest lending data do not confirm any credit crunch concerns, yet. In fact, credit to the private sector has actually increased over the last couple of months; iv) German companies are benefitting from low interest rates as the high dispersion of bond yields across the Eurozone is also reflected in bank interest rates; v) the strong labour market is supporting domestic demand and the lack of qualified workers should prevent unemployment from rising, even if growth was to deteriorate more than expected; vi) finally, the high backlogs of companies and low inventories put a strong safety net under the economy.
If all else fails, the German economy still has fiscal stimulus as the final trump card to cushion a worse-than-expected slowdown. At least as regards fiscal balances, the German government has become a model student of the Eurozone class. Strong economic growth of the last two years has created significant revenue windfalls, lowering the fiscal deficit to around 1.5% this year and close to 1% next year. Moreover, German public finances are also benefitting from the sovereign debt crisis. The safe-haven effect on German government bonds has provided a net profit of around 9bn euro to the German government.
Interestingly, in cyclically-adjusted terms, Germany will be close to fulfilling the new European debt-break rules in the next two years. Against this background of a favourable fiscal outlook, the German government agreed on a tax relief of around 8bn euro (0.3% of GDP) for 2013. Obviously, there would be room for more, particularly given the fact that the next federal elections will be held in late-2013.
At the end of 2011, the German economy is finally feeling the strong headwind from the Eurozone debt crisis. The German export-dependence is again showing its ugly face. It would need an unexpected consumption or production boom in the last two months of the year to prevent negative growth in the fourth quarter. In fact, the impressive growth rally with ten consecutive quarters with strong GDP growth has come to an abrupt end. At the current juncture, however, German fundamentals look too sound to fear a spreading of weak exports into other sectors of the German economy. Contrary to 2008, the economy should not fall off a cliff but rather re-emerge after a soft patch. The length of the soft patch will to a large extent be determined by the management of the debt crisis. The German economy should remain the stronghold of the Eurozone. It is faltering, but not falling.
Thursday, December 8, 2011
ECB meeting - Lender of last resort, but not for governments
The ECB cut interest rates by 25bp, lowering the refi rate to 1.0%. Within a month time, the new ECB president Mario Draghi has eradicated the hotly contested rate hikes of his predecessor. Ironic enough, the rate reversal was not the most sensational decision of today’s ECB meeting. With additional non-standard measures, the ECB took another unprecedented strike to tackle tensions in the money market.
The rate cut was motivated by a further worsening the economic outlook. As a tribute to the latest slowdown of confidence indicators and economic activity, the ECB considers risks to the economic outlook to be substantially to the downside. This downside risk is reflected in a significant downward revision of the ECB staff projections for GDP growth. For 2012, GDP growth is expected to come in at 0.3%, from 1.3% in September. For 2013, GDP growth is expected to pick up again to 1.3%.
On inflation, the ECB today sent a somewhat confusing message. As in November, the ECB still expects headline inflation to drop below 2% in the course of next year. However, the ECB staff projections were revised upwards to 2.0% for 2012, from 1.7% in September, and 1.5% in 2013. According to the ECB risks to price stability balanced. This was also reflected in Draghi’s comment that there was currently no risk of deflation.
The rate cut was one thing, liquidity measures were another thing. The ECB took another unprecedented attempt to tackle money market tensions. In more detail, the ECB presented five more measures: i) two 36-months LTROs at full allotment, with the first operation being allotted on 21 December 2011; ii) a reduction of the rating threshold for certain asset-backed securities (ABS) from AAA to A for ABS comprising residential mortgages and loans to SMEs; iii) national central banks will be allowed to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria; iv) reduction of the reserve ratio from 2% to 1%; and v) a temporary discontinuation of fine-tuning operations carried out on the last day of each maintenance period. Overall, the ECB tries almost everything it can to prevent a credit crunch in the Eurozone.
Prior to today’s ECB meeting, the optimal sequencing of the Eurozone’s final Grand Bargain was a rate cut and more liquidity measures from the ECB today, a ‘fiscal compact’ from political leaders with a clear roadmap towards more political integration and a fiscal union tomorrow and a clear signal from the ECB to do more after the EU summit. At today’s meeting, ECB president Draghi put a stick into the spokes of the Grand Bargain’s wheel. While Draghi had opened the door for more ECB support last week, he closed it again today. According to Draghi, it was up to politicians to solve the debt crisis. The ECB would not respond to a fiscal compact and would not increase its bond purchasing programme. Whether this clear-cut statement was for real and only part of the ECB’s poker game, only the coming days can tell.
All in all, the ECB delivered all it could without crossing the line of Germanic rules of central banking. The last trump card remains up the ECB’s sleeve. For the time being, the ECB does everything to be the lender of last resort for the economy and the financial sector but not for governments.
The rate cut was motivated by a further worsening the economic outlook. As a tribute to the latest slowdown of confidence indicators and economic activity, the ECB considers risks to the economic outlook to be substantially to the downside. This downside risk is reflected in a significant downward revision of the ECB staff projections for GDP growth. For 2012, GDP growth is expected to come in at 0.3%, from 1.3% in September. For 2013, GDP growth is expected to pick up again to 1.3%.
On inflation, the ECB today sent a somewhat confusing message. As in November, the ECB still expects headline inflation to drop below 2% in the course of next year. However, the ECB staff projections were revised upwards to 2.0% for 2012, from 1.7% in September, and 1.5% in 2013. According to the ECB risks to price stability balanced. This was also reflected in Draghi’s comment that there was currently no risk of deflation.
The rate cut was one thing, liquidity measures were another thing. The ECB took another unprecedented attempt to tackle money market tensions. In more detail, the ECB presented five more measures: i) two 36-months LTROs at full allotment, with the first operation being allotted on 21 December 2011; ii) a reduction of the rating threshold for certain asset-backed securities (ABS) from AAA to A for ABS comprising residential mortgages and loans to SMEs; iii) national central banks will be allowed to accept as collateral additional performing credit claims (namely bank loans) that satisfy specific eligibility criteria; iv) reduction of the reserve ratio from 2% to 1%; and v) a temporary discontinuation of fine-tuning operations carried out on the last day of each maintenance period. Overall, the ECB tries almost everything it can to prevent a credit crunch in the Eurozone.
Prior to today’s ECB meeting, the optimal sequencing of the Eurozone’s final Grand Bargain was a rate cut and more liquidity measures from the ECB today, a ‘fiscal compact’ from political leaders with a clear roadmap towards more political integration and a fiscal union tomorrow and a clear signal from the ECB to do more after the EU summit. At today’s meeting, ECB president Draghi put a stick into the spokes of the Grand Bargain’s wheel. While Draghi had opened the door for more ECB support last week, he closed it again today. According to Draghi, it was up to politicians to solve the debt crisis. The ECB would not respond to a fiscal compact and would not increase its bond purchasing programme. Whether this clear-cut statement was for real and only part of the ECB’s poker game, only the coming days can tell.
All in all, the ECB delivered all it could without crossing the line of Germanic rules of central banking. The last trump card remains up the ECB’s sleeve. For the time being, the ECB does everything to be the lender of last resort for the economy and the financial sector but not for governments.
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