Monday, April 30, 2012

Eurozone - Towards a growth compact?

There's nothing you can do that can't be done. Nothing you can sing that can't be sung. Nothing you can say but you can learn how to play the game. It's easy. Nothing you can make that can't be made. No one you can save that can't be saved. Nothing you can do but you can learn how to be you in time. It's easy…

The old lyrics from The Beatles have recently received new life from Eurozone crisis managers. It started as a theme in the French presidential election campaign but now seems to have become the new tune for the entire Eurozone: All You Need Is Growth.

More and more politicians and policymakers, in both peripheral countries but also core countries, are calling for more European focus on economic growth. Last week, when talking to European Parliament in Brussels, ECB president Mario Draghi gave this new initiative a name: a growth compact.

As last year, when Mario Draghi was the name patron of the latter fiscal compact, the big question now is what exactly is a growth compact? The funny and charming characteristic of Draghi’s fiscal compact is that it is something for everyone. Of course, all European policymakers immediately embraced the idea of a growth compact. A surprise? Not really. Who would seriously not be in favour of more growth? However, at the current juncture, there are still diverging interpretations of what a growth pact for the Eurozone could be.

For one group, the growth compact looks like a synonym for diluting the fiscal framework, including the fiscal compact signed in March, and the austerity-based Eurozone crisis management. For this group, the growth pact means less austerity, more deficit spending and hoping for growth. Eight Eurozone governments, including France and the Netherlands, need to bring their deficits back to 3% of GDP next year. Weak or no growth would complicate this undertaking. However, it is a misconception that renegotiating the fiscal compact would change the 3%-target for next year. The 3%-norm and the so-called excessive deficit procedure are part of the European Treaty.

For the second group, the growth compact would be complementary to the fiscal compact but would lean on additional European initiatives, as for example bolstering the European Investment Bank and using EU infrastructure funds more flexible. Last week’s news of a proposed increase of the EU budget by more than 6% shows the direction, even if such an increase still faces lots of national oppositions. Some in this second group also favour common Eurobonds to lower refinancing costs of most Eurozone governments, freeing more government funds for growth.

For the third group, the growth compact simply means sticking to deleveraging and structural reforms to restore competitiveness and economic growth. This group looks willing to further formalise measures discussed last year under the Euro plus pact and refer to increased policy coordination under the fiscal compact but not much more.

So far, it looks as if French presidential candidate Hollande can be placed somewhere between group one and two, while Mario Draghi and German Chancellor Merkel look likely to define a growth compact according to group two and three.

For the time being, the growth compact for the Eurozone is still a grab bag. With the ECB meeting and the upcoming second round of the French presidential elections, the next days could shed more light on what a growth compact for the Eurozone could look like. However, no matter what the Eurozone will find in the grab bag, it will clearly not be a silver bullet.

Wednesday, April 25, 2012

Six-cylinder engine splutters - German economic outlook

Although still flirting with a technical recession, the German economy should remain the bright spot of the Eurozone. However, it could be time for a new reform agenda.

At the end of last year, the German economy had finally lost its immunity against the Eurozone sovereign debt crisis and joined the pack of contracting economies. German GDP dropped by 0.2% QoQ, the first contraction of the economy since the end of the recession. Despite a disappointing fourth quarter, the year 2011 was one of the best performing years in terms of GDP growth since German reunification.

The first months of the New Year gave rise to hopes that the fourth quarter was just a brief stopover. However, the February freeze spoiled the party, sending the construction sector down by almost 20% MoM. Instead of experiencing a quick rebound, the economy is still flirting with a technical recession. Any catching up of the construction sector in March and the overall rebound in industrial production would have to be impressively strong, to return the economy into recession-free territory already in the first quarter.

Looking ahead, confidence indicators still point a very optimistic picture of the economy. Most leading indicators have been on the rise since late-2011 and their overall levels still point to solid growth. However, with the increasing discrepancy between the soft and the hard data gives rise to fear that the outlook for the economy is more nuanced than during the last years. The exuberance of 2010 and 2011 will make room for more realism and lower expectations.

The good news is that Germany should remain the showcase of the Eurozone economy. The country does not suffer from internal imbalances and consequently no imminent cleaning up works. There are a couple of unique selling points of the German economy: i) the risk of a credit crunch is relatively low. Contrary to many European peers, German banks have not, yet, tightened their lending conditions. Due to restructuring during the early 2000s, German companies should be well prepared with cash or internal financing as the most likely alternatives to bank financing; ii) low inventories and still high backlog orders are an important safety net for the industry, ensuring production even if demand for German products weakens; iii) export diversification, both in terms of product specialization and export destination, enables German exporters to benefit from almost any recovery on this planet. In 2011, three out of the five most German important trading partners were actually countries outside the Eurozone; and iv) the often mentioned solid economic fundamentals, recent wage increases and house price increases should support domestic demand.

At the same time and as in real life, however, unique selling points are no guarantee for success. In fact, there are clear limits to positive surprises. As even main trading partners from the Eurozone core are starting to engage in austerity measures (France and the Netherlands), the sovereign debt crisis is coming closer to the German borders. Moreover, with high energy prices, a cooling of the Chinese economy and a still rather anaemic US recovery, the growth impulse from non-Eurozone demand could disappoint. On the domestic side, the housing market could become an important growth driver. However, hopes for more domestic consumption on the back of higher wage could easily be disappointed. As German exporters have already been squeezing their margins to secure market shares, wage increases as the 6.3% over two years for public workers are unlikely to materialise in the tradable sector. For the entire economy, wages should hardly outperform headline inflation in the next two years.

In sum, even at a slower pace, the German economy should remain one if not the only bright spot of the Eurozone. With GDP growth rates of 0.8% this year and 1.6% next year, the economic slowdown should not be a cause of concern. At least in the short run, the slowdown should simply be part of growth stabilisation at high level.

For the medium term, however, the current slowdown should be a first reminder that all good things can come to an end. The rapidly ageing population will put significant downward pressure on German trend growth in the next two decades, it will not be sufficient to simply rely on the structural reforms of the mid-2000s. In fact, a new reform agenda to transform the current growth model into a knowledge-based economy, focussing on education and innovation, consumption taxes and higher employment, could help securing the leading economic position.

With a lack of domestic imbalances and no pressing cleaning up works, the German economy remains the six-cylinder growth engine of the Eurozone. However, particularly Germans should know very well, that regular maintenance services with some reparations are always better than paying the costs of a total loss when it is too late.

Monday, April 23, 2012

Eurozone: Economics meets politics again

The first round of the French presidential elections and political turmoil in the Netherlands could mark the beginning of new controversies on the Eurozone’s crisis management. François Hollande and Nicolas Sarkozy are the two finalists of the French Presidential elections with 28.5% and 27.1%. Negotiations between the losing candidates and the finalists are likely to be tense. Both Hollande and Sarkozy will now try to get as much support as possible from the losing candidates to win the runoff elections in two weeks. It looks as if François Hollande can probably obtain all support from the left wing without major problems. This support should represent around 15% of the votes. Nicolas Sarkozy is likely to have more difficulties to attract the Front National’s voters (far-right party), which obtained 19%. Marine Le Pen, the Front National’s leader, is a clear opponent of Nicolas Sarkozy. However, her voters are closer to Sarkozy than Hollande. François Bayrou, the centrist leader, has obtained around 9.1%. At this time, he has not given any voting instruction. Polls show his voters could be split in three parts for the second round; 1/3 to Hollande, 1/3 to Sarkozy and 1/3 to abstention. This would secure a victory for Hollande. The main challenge for the second round for Sarkozy is therefore to attract Front National voters and centrist voters. But, at this time, polls show the transfer of vote seems to be favourable to Hollande. Elsewhere during the weekend, the Dutch government negotiations on the budget came to a standstill. Prime Minister Mark Rutte, whose centre-right minority coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders from the Freedom Party had refused to do a deal. Since the elections, the Freedom Party had a pact to support Rutte's minority government in parliament, giving it the majority to pass legislation. The Dutch government still needs to find additional budget consolidation to bring its fiscal deficit to 3% GDP next year as the country is running under the so-called European excessive deficit procedure. With Saturday’s decision, it looks likely that new elections will be announced shortly. Interestingly, there does not seem to be a political majority anymore to bring the deficit to 3% next year. Latest developments in France and the Netherlands could lead to a change of their respective political and economic stance. Obviously, both core Eurozone countries are currently running under the excessive deficit procedure and will have to bring their fiscal deficit back to 3% of GDP next year, which would – given this year’s deficits – still require significant additional efforts. Moreover, let’s not forget that both countries (as all other European countries) still have to ratify the new fiscal compact. It should not be excluded that we could see a repetition of the 2002-2004 episode when the fiscal rules were changed after the biggest Eurozone countries had breached them. The drivers behind last weekend’s political developments in both France and the Netherlands are not necessarily the same. However, the outcomes might have one common denominator: they could mark the beginning of a change to the entire Eurozone crisis management.

Friday, April 20, 2012

Ifo on the rise - Discrepancy between hard and soft data widens

Unrealistically optimistic? Today’s Ifo index shows that German businesses have not lost their overwhelming optimism. In April, the Ifo index increased to 109.9, from 109.8 in March, the sixth consecutive increase. While the current assessment component increased to its highest level since September last year, expectations remained unchanged.

Since the beginning of the year, the discrepancy between soft and hard data has increased significantly. While confidence indicators continued to increase, pointing to a very optimistic picture of the economy, the real economy has troubles picking up pace again. It looks as if the February freeze has extended the growth stopover by another quarter. Instead of experiencing a quick rebound, the economy is still flirting with a technical recession. Any catching up of the construction sector in March and the overall rebound in industrial production would have to be impressively strong, to return the economy into recession-free territory already in the first quarter.

Looking beyond the first quarter, our outlook for the German economy is more nuanced than during last the last years and the exuberance of 2010 and 2011 could soon make room for more realism and lower expectations. With austerity-driven slowdowns coming to most other core Eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic US recovery, export growth should clearly come down. However, hopes for more domestic consumption on the back of higher wage could easily be disappointed. As German exporters have already been squeezing their margins to secure market shares, substantial wage increases as recently agreed for the public sector are unlikely to materialise in the tradable sector.

In our view, today’s Ifo index paints a too positive picture of the growth prospects for the German economy. Of course, with a lack of domestic imbalances and no pressing cleanup efforts, the German economy remains the six-cylinder growth engine of the Eurozone. However, it is not running at full throttle anymore.

Tuesday, April 17, 2012

German ZEW index still on the rise

The ZEW index continued its recent upward trend in April, increasing for the fifth consecutive month. The ZEW index, which measures investors' confidence now stands at 23.4, from 21.3 in March. At the same time, the current assessment component also increased to 40.7, from 37.6.

The positive ZEW reading adds to recent encouraging signals from the German economy. Both the ZEW and the Ifo index have been on a non-stop upward trend since the end of last year. Higher oil prices, new market turmoil and a return of sovereign debt woes, it looks as if – at least in the eyes of financial analysts – nothing can stop the German economy. However, this renewed optimism is still not reflected in the hard economic data. Yes, the economy avoided falling off the cliff but, at the same time, the stabilisation since the beginning of the year turned out to be weak. In fact, the German economy is still flirting with recession.

Today’s ZEW index is good news but it should be taken with a pinch of salt

Saturday, April 14, 2012

Letter from Brussels – Einäugiger Superman

Ganz Brüssel erstarrt mittlerweile in Ehrfurcht vor Europa’s neuem Superman: Deutschland. Nichts geht mehr ohne Berlin. Politische Dickköpfigkeit und der erfolgreiche Wandel vom kranken Mann zum unangefochtenen Wachstumssuperstar scheinen eine neue Ara von deutscher Dominanz eingeleitet zu haben.

Natürlich geht es im Augenblick gut mit der deutschen Wirtschaft. Der starke Arbeitsmarkt, konkurrenzfähige Unternehmen, reichgefüllte Auftragsbücher und relativ gesunde Staatsfinanzen sind eine gute Versicherung gegen die Misere vieler anderer Euro-Länder.

Bei so viel Beweihräucherung ist jedoch Vorsicht geboten. Hinter starken Exportzahlen verstecken sich schon niedrigere Gewinnmargen, um Marktanteile zu halten. Wenn der Rest Europas in die Rezession abgleitet, der amerikanischen Konjunktur in der zweiten Jahreshälfte die Luft ausgeht und auch China schwächelt, müsste schon Leben auf dem Mars entdeckt werden, um die Exporterfolge der letzten Jahre fortzusetzen. Natürlich stärkt der stabile Arbeitsmarkt die Inlandsnachfrage. Aber mit zunehmendem Druck auf den Exportmärkten sinkt die Wahrscheinlichkeit höherer Lohnabschlüsse und der hohe Ölpreis wird auch seine Spuren hinterlassen.

Will man das Wirtschaftswunder der letzten zwei Jahre fortsetzen, bedarf es weiterer Strukturreformen. Im Augenblick zehrt die deutsche Wirtschaft noch von den durch ex-Kanzler Schroeder angestoßenen Reformen. Beim ganzen Euro-Retten vergisst man jedoch die eigenen Hausarbeiten. Laut einer aktuellen OECD Studie ist Deutschland mittlerweile nämlich Schlusslicht bei der Durchführung neuer Strukturreformen.

Die deutsche Wirtschaft wird in den nächsten Jahren das Beste bleiben, was Europa zu bieten hat. Wenn man sich jedoch zu lange auf den Lorbeeren der Vergangenheit ausruht, kann aus dem Wachstums-Superman sehr schnell der Einäugige im Land der Blinden werden. Dominanz sieht anders aus.

Dieses Stueck erschien heute als "Letter from Brussels" in der "Euro am Sonntag"

Thursday, April 12, 2012

Zonder tranen geen transfers

Bijna 23 jaar na de val van de Berlijnse Muur krijg ik nog steeds tranen in mijn ogen bij de televisiebeelden van toen. Gelukkige, huilende en uitbundig vierende mensen. Oude herinneringen komen naar boven. Hoe ik vroeger in het bos speelde van de verdeelde stad Berlijn en er tegen bordjes aanliep met 'You are leaving the American sector' en direct daarachter de Muur. Hoe ik aan de westerse kant van de grens roeide en aan de andere kant de Oost-Duitse waterpolitie patrouilleerde, die ook op het water de weg naar de vrijheid versperde. Maar bovenal herinneringen aan de apotheose van de val, waarbij ik die novembernacht in 1989 zelf op de Muur stond bij de Brandenburger Tor. Tranen en emoties van heel veel Duitsers vormden de basis voor onvoorwaardelijke financiële solidariteit: transfers door tranen.

Maar als het om oplossingen voor de eurocrisis gaat, zijn er twee kampen: de profeten van het einde van de euro en de federalisten, die de euro alleen zien overleven in de Verenigde Staten van de Eurozone. Een federale structuur met transferbetalingen, naar Duits voorbeeld. Gek genoeg lokt het woord 'transferunie' net bij de Duitsers een allergische reactie uit. Want de Duitse ervaring gaat veel verder terug.

Al in 1950 begon de Länderfinanzausgleich, synoniem voor de directe en indirecte herverdeling van belastinggelden. Inmiddels wordt jaarlijks 35 miljard euro herverdeeld. Tot grote economische convergentie heeft dat echter niet geleid. Na 60 jaar is er één succesverhaal: Beieren. De welvarende deelstaat onderging een metamorfose van netto-ontvanger naar nettobetaler, en is nu zelfs de grootste betaler in het Duitse systeem.

Het is niet enkel een Duitse les: transferbetalingen remmen vaak hervormingen. Waarom moeite doen als het helpende geld vanzelf binnenkomt? Dat systeem komt onder grote druk zodra de netto-betalers de broekriem moeten aanhalen. Want jaloezie doet de solidariteit en gulheid snel slinken. Zelfs in eigen land.

Zestig jaar Duitse transferunie bewijst dat onvoorwaardelijke steun de verschillen in inkomsten en welvaart hooguit stabiliseert. Economische convergentie komt er uitsluitend op eigen kracht. Onvoorwaardelijke steun komt voort uit emoties, niet uit economische overwegingen. Ik vrees dat over twintig jaar weinig Duitsers met tranen in de ogen naar televisiebeelden van de Akropolis zullen kijken. Daarom kunnen we alleen maar concluderen: zonder tranen geen transfers.

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

Monday, April 9, 2012

German exports defy February freeze

A reliable friend. German exports defied the general February freeze of the economy and increased for the second consecuetive months. As just reported by the Federal Statistical Office, German exports increased by 1.6% MoM, from 3.4% MoM in January. At the same time, imports increased by 3.9% MoM, narrowing the seasonally-adjusted trade balance to 13.6 bn euro, from 15.1 bn in January.

Last week’s industrial data showed that the German economy is still flirting with a technical recession. However, a weather-driven sharp rebound of the construction sector, moderate production and today’s trade data still have the potential to lift the economy into recession-free territory.

More and more, the German economy’s destiny is in the hands of its trading partners outside the Eurozone. Detailed data for 2011 trade last week showed that the Eurozone crisis is getting closer and closer to the heart of the German economy. In Q4 2011, exports to the biggest Eurozone trading partner, France, still increased by 8.9% QoQ, while exports to the Netherlands were only up by 2.3% and exports to Italy even dropped sharply (-7% QoQ). The main drivers of Germany’s export engine are currently non-Eurozone countries: the US, the UK and China.

Germany’s dependence on international – and therefore less intra-Eurozone trade – will not make the necessary rebalancing of the Eurozone economy any easier. Even if there has been a tender catching up in terms of price competitiveness by Eurozone peripheral countries vis-à-vis Germany since early 2010, a continuation of this trend will not be easy. The peripheral part of this rebalancing is already a painful one. However, ideally, the rebalancing also requires a German part but German exporters look unlikely to play this role. Since early 2010, German companies have already started to squeeze their margins more than other Eurozone countries, helping to sustain market shares. Obviously, German companies cannot squeeze margins forever. As a consequence, the tolerance for and acceptance of higher wages in the non-tradable sector (as e.g. illustrated by the recent 6.3% raise in the public sector) should remain much higher than in the tradable sector. Eurozone rebalancing will remain a very bumpy road.