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.