Tuesday, July 31, 2012

Gradual slowing of German labour market continues

German unemployment increased by a non-seasonally adjusted 66,900 in July, bringing the number of unemployment to the highest level since April. As a warning signal, this is the strongest July worsening since 2004. In seasonally-adjusted terms, unemployment also increased slightly, still leaving the seasonally-adjusted unemployment rate unchanged at 6.8% for the eighth month in a row. Earlier today, retail sales disappointed in June, dropping for the third consecutive month.

With high employment, dropping inflation and latest wage increases, the labour market should continue to be “the” crucial driver of domestic demand this year. To some extent, the labour market has been Germany’s active immunisation against the ongoing Eurozone crisis. However, signs that this immunisation is fading away are hard t miss. Employers have continuously downscaled their recruitment plans and employment expectations in the manufacturing industry have dropped to the lowest level since April 2010. Moreover, vacancies continue to drop, the demand for temporary work is slowing and some companies have even started to introduce short-time work schemes again.

The looming slowing of the German labour market could also put a quick end to a tender new trend: labour mobility in the Eurozone. The absence of labour mobility is often cited as one of the main problems of the monetary union. However, the current crisis has actually led to first signs of (involuntary) labour mobility; from the Eurozone periphery to Germany. Sine 2008, immigration to Germany from Spain and Greece has more than doubled. While during the same period, German employment increased by more than 3%, the number of employees with a Portuguese, Spanish or Italian nationality increased by around 6%. The number of employees with a Greek nationality increased by less than 3%. Although there still is a lack of highly skilled workers and experts in some sectors (eg in engineering), the cooling of the German labour markets should limit possibilities for further Eurozone labour market mobility.

All in all, the German labour market is clearly losing momentum. Given the high level of employment, there is no need to panic. However, indications are increasing that light-hearted times are coming to an end.

ECB preview - Draghi's dilemma

Latest comments from several government leaders and Mario Draghi have increased the stakes for Thursday’s ECB meeting. The pledge to do “whatever it takes” to save the euro gave rise to speculation about imminent ground-breaking actions. With these expectations, the ECB’s balancing act between providing the bare minimum to keep the Eurozone together, while at the same time keeping maximum pressure on politicians has not become any easier.

Indicators released since the last rate-setting meeting have provided no evidence that the gradual downward slide of the Eurozone economy is quickly coming to an end. A contraction of the economy in Q2 is in the offing and with the continuous drop in sentiment indicators, a technical recession (i.e. two consecutive quarters of contraction) seems hard to avoid. At the same time, credit growth remains lacklustre and inflationary pressures are fading away very quickly, opening the door for another rate cut.

With the recent intensification of market turmoil calls on the ECB to intervene have emerged again. Awaiting the German Constitutional Court’s verdict on the ESM in September, Eurozone politicians’ hands are at least partly tied. As long as the ESM is not up and running any additional claim on the EFSF to, for example, give Spain a fully-fledged bailout could easily stretch the EFSF’s capacity to its limits. Moreover, any further decisions on Greece are highly dependent on the Troika’s next assessment which will probably only be presented in September. All of this means that ideally Eurozone politicians would like to postpone all next crucial issues and decisions until the second half of September. The only one able to buy them this time is the ECB.

Last week, Mario Draghi’s statement that “within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough” gave rise to speculation about imminent ECB action. Maybe even ground-breaking action like a liquidity line for the ESM, caps on bond yields or at least large scale bond purchases? Statements by the German, French and Italian government leaders that they would do everything to safeguard the euro added to speculations about big things to happen.

This speculation, in our view, might be a bit exaggerated. At this stage, a liquidity line for the ESM looks highly unlikely. Even large scale bond purchases, with or without explicit targets, should in our view not be taken for granted. It is hard to believe that the ECB is really willing to make a u-turn on its crisis strategy. Up to now, the ECB has been on a balancing act between providing the bare minimum in terms of emergency aid to calm markets, while at the same time keeping maximum pressure on Eurozone politicians to continue with austerity and reforms. Any action to substantially tackle the debt crisis would come with a high risk of inviting political complacency and moral hazard. Remember that only back in June, Draghi said denied that there was any kind of tit-for-tat. Providing unprecedented ECB action at this state would be a clear game changer and almost a down payment for governments.

After his strong statements, ECB president will have to deliver something on Thursday. Chances are high that Draghi’s definition of “whatever it takes” does not necessarily match markets’ definition. A face-saving measure would be large-scale purchases of Spanish bonds on behalf of the EFSF. For this to happen, however, the Spanish government would first need to send an official request. According to German finance minister Schaeuble an unlikely scenario. This would leave the ECB with the minimalist approach for Thursday: a bit of SMP and maybe a bit of more tailor-made credit stimulus, LTRO and possibly even a rate cut.

Thursday, July 26, 2012

Eurozone - (desperate) attempt to load the bazooka?

Markets reacted cheerfully to Austrian central bank governor Nowotny’s comments on a possible banking licence for the ESM. Too cheerfully, in our view.

The latest escalation of market tension, elevated bond yields in Southern European countries and speculation about future bailouts in the Eurozone has again given rise to concerns about the size of the Eurozone’s rescue funds, the bazooka. Remember that, despite earlier attempts to find highly sophisticated but disappointing leverage options and the famous permanent rescue fund, the ESM, currently the only active rescue fund (besides the ECB) is the temporary EFSF.

How much money can the EFSF still use? The EFSF started with a lending capacity of €440bn. Up to now, the EFSF has actually disbursed €138.3bn for Ireland, Portugal and Greece. Shortly, €30bn will follow in the first tranche for the Spanish bank bailout. Additional €85bn plus up to €70bn for Spain have already been reserved for the remainders of the bailout programmes. If all reserved disbursements will be paid out, the EFSF would only have roughly €120bn left for any future bailouts or other actions. Obviously, this is not a lot.

The ESM, with a fresh lending capacity of €500bn, was supposed to bring some relief but this relief will, at the earliest, only come after the German Constitutional Court’s verdict in September. However, even with an ESM up and running, concerns about its size are likely to continue. This is why periodically new proposals to increase the Eurozone rescue funds’ fire power are circulating. Basically, there are only two ways to increase the EFSF/ESM’s size: either Eurozone countries increase their individual shares (currently highly unlikely in several core countries) or the ECB enters stages (either directly or indirectly).

One of the favourite options for indirect ECB participation is the so-called banking licence for the ESM. The aim of this idea is to increase ESM leverage through ECB liquidity. The label banking licence is actually misleading. The ESM does not need a banking licence. As stated in the ESM Treaty, “the ESM shall be exempted from any requirement to be authorized or licensed as a credit institution”. The only thing the ECB would have to do is grant the ESM access to its liquidity operations, as the ECB already did for the European Investment Bank in 2009.

Yesterday, the Austrian central bank governor Nowotny said that he could see arguments for this banking license idea. Interestingly, Draghi had earlier opposed this idea. Markets reacted positively to this statement. Too positively, in our view.

Although we principally remain in favour of ECB leverage for the ESM to increase its fire power, it would not be the new silver bullet, nor will it come any time soon. First of all, there is no ESM, yet. It looks highly unlikely that the ECB could grant anything to an institution that does not exist. Moreover, the ESM Treaty has put a cap on the ESM’s lending capacity at €500bn. ECB leverage would not automatically increase the €500bn. According to the ESM Treaty, the ESM could increase the maximum lending capacity but it is doubtful that this would happen immediately. Moreover, the sentence “Such a decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures” indicates that raising the lending capacity might not exclusively be determined by the ESM. In addition, the German Constitutional Court could still increase the influence of the German parliament on such crucial decisions. Finally, there remains the unsolved issue of whether ECB leverage for the ESM would be monetary financing. In a legal opinion from March 2011 the ECB stated that "Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB."

Yesterday’s comments might have been a first step towards of another ECB shift. However, there are still too many unsolved issues to seriously expect that the ECB would take such an action before the ESM is up and running. In our view, the Nowotny effect should fade away very quickly.

Wednesday, July 25, 2012

Philipp, bel Supernanny toch maar even

Niet zo lang geleden kon je nauwelijks de televisie aanzetten zonder op een of ander opvoedprogramma te stoten. Schreeuwende ouders en muitende kinderen. Ruzie was voorgeprogrammeerd, en een oplossing was niet in zicht. Tot Supernanny verscheen. Die loste met haar strafhokjes en een rustige, maar consequente aanpak de problemen op. Hoewel hij een gediplomeerde arts is, heeft de Duitse minister van Economische Zaken, Philipp Rösler, blijkbaar niet zo vaak naar 'Supernanny' gekeken.

Mij is niet duidelijk of er sinds afgelopen weekend de nieuwste aflevering van de eurocrisis draait, dan wel alleen maar een 'best-of'van 'Supernanny'. Wat is er gebeurd? De ouders zijn boos. Het kind, Griekenland, wil zijn kamer nog steeds niet opruimen. Of beter, in zijn kamer heerst de absolute chaos. Stapels speelgoed en troep, waar je ook kijkt. Als de ouders het kind op het matje roepen, heeft het geen gebrek aan goede uitvluchten: eerst was er geen tijd vanwege permanente verkiezingen, vervolgens was het niet duidelijk hoe de kamer moest worden opgeruimd, en bovendien was er veel te weinig kastruimte om alles op te bergen. De ouders moeten eerst nieuwe meubels kopen, anders gebeurt er helemaal niets. Mama en papa brullen steeds harder: je ruimt nu op, anders ga je het huis uit.

Natuurlijk wil het kind het huis niet uit. Maar de ouders hebben al vaker gedreigd, en ze hebben hun dreigementen nooit waargemaakt. Ze hielpen uiteindelijk zelfs mee bij het opruimen. Waarom zou het dit keer anders zijn? Inderdaad, de ouders willen het kind eigenlijk niet het huis uit sturen. Te veel gedoe, en mogelijkerwijs veel geldverlies. Maar als papa en mama hun geloofwaardigheid niet volledig willen kwijtraken, moeten ze nu volhouden. Nóg een keer buigen en toegeven, en de kamer zal waarschijnlijk nooit meer worden opgeruimd.

Je kunt erover twisten of een Griekse exit elders niet een schrikbeeld is, maar door er te uitgesproken over te zijn, heeft Philipp Rösler de hele Duitse Bondsregering en kanselier Merkel in een moeilijke positie gebracht. Als bij het bezoek van de zogenaamde trojka aan Athene duidelijk wordt dat Griekenland zijn verplichtingen en afspraken niet is nagekomen, blijft Duitsland eigenlijk geen andere keuze dan de stekker eruit te trekken. Anders verliest het zijn geloofwaardigheid. Niet alleen tegenover de Grieken, maar ook voor de 15 andere kinderen van de eurozone. Misschien is dat wel de pedagogische tik voor de rest voor de eurozone, om eindelijk serieus werk te maken van een verregaande integratie. Al blijft het spelen met vuur.

Het advies van Supernanny was altijd dat ouders alleen dreigementen moesten gebruiken die geloofwaardig waren en geen blijvende schade veroorzaken. Het ware toch beter geweest, had Philipp Rösler voor zijn televisie-interview heel even met Supernanny gebeld.

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

German Ifo does not bode well

It looks as if German companies have finally woken up to the reality of the euro crisis. The Ifo index continued its recent downward trend in July, dropping to 103.3, from 105.3 in June. This is the third consecutive drop, bringing the Ifo index to its lowest level since April 2010. Both the current assessment and the expectation component dropped further. Particularly the expectation component’s fall to the lowest level in three years does not bode well for the outlooks of the Eurozone’s biggest economy.

Latest indicators should have been an urgent wake-up call for the German economy. There are clear signs that the manufacturing sector has rashly left the island of happiness. With austerity-driven slowdowns coming now also to most other core Eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic US recovery, order books are emptying and companies have started to reduce stocks.

Nevertheless, the German economy could still be able to escape the real crisis feeling in the second quarter. Up to now, available hard data paint a less bleak picture of the German economy than soft indicators. Compared with the first quarter, industrial production in April and May has been stable, consumption has slightly improved, net exports increased significantly and new orders recently rebounded. Obviously, the jury is still out and the month of June was crisis-loaded enough to have sent the economy into recessionary territory.

At second glance, the picture of relative crisis-resistance has to be a bit more differentiated. In fact, the euro crisis has already reached the external part of the German economy but not the domestic one. Capacity utilisation in the manufacturing industry has been dropping since last summer, indicating that the industrial engine is not running at full speed any longer. Judging from latest developments, the main growth drivers for this year are construction and, with the strong labour market and wage increases, private consumption.

Looking ahead, however, a permanent decoupling of the domestic economy from the external sector seems highly unlikely; particularly in a traditional export-oriented economy like the German one. The euro crisis immunity is clearly fading away. Today’s Ifo gives an unappetising foretaste of worse things to happen.

Monday, July 23, 2012

Greece is back

Wake up call from Germany to anyone who believed that the Spanish bank bailout had created a calm summer for the euro crisis.

Eurozone finance ministers had hardly hung up their phones last Friday, agreeing on the final details of the 100bn euro package for Spanish banks, when it became clear that an old and familiar problem case could require ministers’ full attention earlier than expected. The ECB increased pressure on Greece to comply with the terms of the bailout package by announcing that it would stop accepting Greek bonds as collateral, at least until after a positive verdict from the troika.

Yesterday, news from Germany gave rise to new speculations about a Greek exit. First, the German news magazine “Der Spiegel” reported that the IMF was set to withdraw from the Greek bailout. This does not necessarily mean that the IMF would stop payments but could also mean that the IMF would not contribute to an extension or easing of the current conditions. A bit later, German minister of economic affairs, Philipp Rösler, suggested in a television interview that an exit from the Eurozone could be the best option for Greece. Being more explicit, Rösler clearly said that no money should go to Greece if the Troika concluded that Greek had not fulfilled the bailout conditions.

These new reports and measures come ahead of the next scheduled Troika visit to Athens this week. The Troika will have to prepare another assessment of Greece’s compliance with the bailout conditions so that the next tranche of the loan can be paid out.

Events since Friday have been a clear wake-up call to anyone who thought that the Spanish bank rescue package had bought a calm summer for the euro crisis. Greece is back. In a way, the latest statements and measures reflect a well-known pattern between the Greek government and the other Eurozone countries. It is obvious that lenders are turning up the heat. This does not change the economic analysis of the impact of a possible Greek exit but it shows that patience in at least the biggest Eurozone country is reaching its limits. However, let’s not forget that as long as the ESM is not up and running and the remainders of the EFSF remain the Eurozone’s only anti-contagion tool, a Greek exit looks more like a negotiation strategy than a credible threat.

Tuesday, July 17, 2012

ZEW drops in July

The ZEW index continued its recent downward trend in July, dropping for the third consecutive month. The ZEW index, which measures investors' confidence now stands at -19.6, down from -16.9 in June. At the same time, the current assessment component also dropped to 21.1, from 33.2. This is actually the lowest level since June 2010.

Latest stock market stabilisation, the ECB’s rate cut, the weaker euro exchange rate and lower oil prices have all not succeeded in brightening up German investors.

In the absence of other important macro data for the Eurozone and Germany this week, today’s ZEW index could get more market attention than normal. It will clearly add to growing concerns about the strengths of the German economy. However, throughout the financial crisis, the ZEW index has rather been a euro crisis thermometer than a good leading indicator for German growth.

Looking at the German economy, available monthly hard data so far look actually better than the latest drop of confidence indicators might suggest. Industrial production and private consumption have been rather stable in the first two months of the quarter and the export engine is still running smoothly. The economy has not yet escaped the risk of a contraction in the second quarter but a severe deterioration, as in most other Eurozone countries, should be avoided.

Monday, July 16, 2012

Eurozone - Wake me up when September ends

The German Constitutional Court will present its verdict on the ESM and the fiscal compact on 12 September. A reversal of the ESM looks unlikely, but more powers and control to the German parliament would limit the often called for flexibility of the ESM already from the start.

At least one European institution does not seem to see a need to rush. The German Constitutional Court yesterday announced that it will present the final verdict of the expedited proceedings on the ESM Treaty and the fiscal compact only on 12 September. This is later than expected. Normally, the so-called fast-track procedure leads to final verdicts after three weeks. It is broadly expected that the verdict on the expedited proceeding could already encompass a verdict on the “normal” lawsuits filed against the ESM and the fiscal compact.

The common denominator of the several filed lawsuits is that the ESM would lead to unlimited risks and liabilities for German taxpayers. Moreover, the ESM would undermine the national sovereignty on the national budget. The complainants argue that the ESM would fundamentally change Europe, while the German government has always answered that both the ESM and the fiscal compact were only necessary requirements to ensure the stability of the euro as provided in existing European Treaties.

Basically, there are three possible scenarios possible: 1) an unconditional yes to the two Treaties; 2) a conditional yes to the two Treaties, asking for more control powers and responsibilities for the German parliament; and 3) a refusal of the two Treaties. Obviously, the third option would lead to sheer chaos on financial markets as it would reverse all rescue efforts taken over the last two years. In our view, however, this outcome is highly unlikely and would not be in line with past verdicts. The other two options would finally give the green light for the ESM. Our current take on the most likely outcome is along the lines of an earlier verdict by the Constitutional Court, which had given the German parliament a veto right for all Eurozone bailouts. In this scenario, however, the often called for flexibility of the ESM would obviously be reduced or limited already at the start.

An announcement of the German Constitutional Court’s verdict on the ESM in September should still be quick enough not to derail markets, but will not lower uncertainty in the coming weeks. Maybe even more important, the upcoming verdict is another reminder that the destiny of the monetary union is not exclusively in the hands of policymakers. It might be an irony of fate that on the day of the Court’s announcement there will be a second event which could also have an impact on the Eurozone crisis management: the Dutch elections.

All of a sudden it looks as if the month September, rather than June or July, will bring new milestones in the Eurozone crisis. It might not be their favourite music style, but with two crucial upcoming events that are out of their direct influence, Eurozone policymakers might start humming the tune of a successful hit of the American rock band Green Day. “Wake me up when September ends.”

Sunday, July 1, 2012

Letter from Brussels - Keine einfachen Fussballweisheiten

Es wird wohl für immer ein Geheimnis bleiben, ob Angela Merkel und Mario Monti am Donnerstag zusammen Fußball geschaut haben. Die Schadenfreude des Einen wird der Anderen aber nicht verborgen geblieben sein. Es ist ein Augenzwinkern des Schicksals, dass der Kampf um den Euro zum gleichen Zeitpunkt wie der Kampf um die Euro 2012. Natürlich gibt es viele Parallelen zwischen Fußball und Politik oder Wirtschaft. Wenn man sich aber in den kommenden Wochen und Monaten nur auf Fußball Weisheiten verlässt, wird es 2016 immer noch die Euro, aber vielleicht keinen Euro mehr geben.

Es klinkt einleuchtend: wie die deutsche Fußballnationalmannschaft ist die deutsche Wirtschaft nach mehreren Tiefschlägen, eingreifenden Reformen und neuer Taktik wieder in die internationale Topklasse aufgestiegen. Verständlich, dass man nach dem lange Weg aus der Krise und aus der Depression die neue Glückseligkeit nicht schnell mit anderen Ländern teilen will. Schließlich gab es ja auch bei der EM keine Vergemeinschaftlichung der deutschen Tore.

Bei der Euro 2012 gibt es morgen einen (nicht deutschen) Gewinner. In der Euro-Krise jedoch nicht. Beim Ende der Euro-Krise wird es nur Gewinner oder nur Verlierer geben. Daher ist der einzige Ausweg ein gemeinschaftlicher bei dem jeder etwas Wasser in den Wein schütten muss. Kurzfristige Hilfe muss konditionell bleiben. Deutschland kann seinen größten Trumpf nicht einfach so aus der Hand geben. Langfristig wird der Euroraum nur überleben können als politische Union nach dem Subsidiaritätsprinzip, d.h. weitgehende Macht für Europa, aber nur auf bestimmten Gebieten. Sobald das gewährleistet ist, kann auch die Bundesregierung die Tür zur Haftungsgemeinschaft öffnen. Ob nun als Bankenunion, Schuldentilgungsfonds oder kurzfristige gemeinsame Anleihen ist dabei beinahe zweitrangig. Es wäre doch schön, wenn die deutsche Nationalmannschaft ihre Titelprämie 2016 in Euro ausgezahlt bekommt.

Dieser Letter from Brussels erschien in der Euro am Sonntag vom letzten Wochenende