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.