Tuesday, October 30, 2012

MIld slowdown of German labour market continues

The mild slowdown continues. German unemployment dropped by a non-seasonally adjusted 34,900 in October, bringing the number of unemployed down to the lowest level since November last year. Currently, 2.753 million people are without a job. However, this was the weakest October improvement since 2002. In seasonally-adjusted terms, unemployment increased slightly, leaving the seasonally-adjusted unemployment rate unchanged at 6.9% after an upward revision of the September data. With hindsight, the September increase was the first increase since June 2009.

The strong labour market has been one of the main drivers of German growth in the first half of the year. Low unemployment, record high employment and the latest increase in real wages supported private consumption and helped cushioning the industrial slowdown.

Looking ahead, however, it is doubtful whether private consumption can really take over the baton as main growth driver for the German economy. Employment expectations in the manufacturing sector have entered negative territory, most open vacancies are temporary jobs and several companies have reintroduced short-time work schemes. The official vacancy index for the entire economy dropped to 160, from 161 in September. This was the fourth decline within five months and another sign of a cooling labour market. However, this is not a general cooling. Up to now, the euro crisis and the slowdown of the global economy have only affected the export sector but hardly the domestic economy. Companies operating in domestic sectors, as eg the construction sector and health services, still have a strong demand for labour. The lack of qualified workers and employees continues to be a pressing issue in some sectors, indicating that the labour market could enter a two-speeded period.

Today’s numbers provide further evidence that the labour market is gradually losing steam, indicating the cushioning impact on the economy should peter out in the coming months. However, the lack of qualified employees and still strong labour demand in domestic sectors should make the current slowdown a very gentle one.

Greek days have started

With three meetings in less than two weeks, Eurozone finance minsters hope to finally strike a deal on giving Greece more time for its adjustment.

The decisive phase for Greece has started. Yesterday, Eurogroup president Juncker announced an unscheduled meeting of Eurozone finance ministers on 8 November. With the scheduled conference call of ministers on 31 October and the already planned Eurogroup meeting on 12 November, ministers will have three meetings to decide on further steps for Greece. Even if the Troika report has not (yet) been officially released, it seems clear that the Eurozone is willing to give Greece somewhat more time for the adjustment.

More time, however, would eventually also cost more money. According to earlier market reports, a two years delay of the austerity measures could lead to a financing gap of between 15bn and 30bn euro. This financing gap would have to be closed to keep the IMF on board of the Greek rescue and to be able to pay out the next tranche of the loan. Of course, always assuming that Greece fulfills its obligations of the structural reforms and austerity measures.

Generally speaking, more time for Greece could be “bought” by two main options: a third bailout package or debt forgiveness. This is what according to media report is also proposed by the Troika. However, none of these two options is politically attractive for most Eurozone countries as both options would cost tax payers’ money. Therefore, it did not come as a surprise that the German government directly and indirectly tried to rule out both options, with opposition against debt forgiveness being much louder than against a third package. Particularly, German chancellor Merkel seems to be – very gradually – giving up opposition against a third aid package. While a third Greek bailout would probably not be supported by all of her own coalition’s lawmakers, Merkel could get parliamentary support from the biggest opposition party, the social democrats. Less than one year ahead of the federal elections, Eurozone matters could increasingly be dominated by German domestic politics.

Debt forgiveness (aka Official Sector Involvement) would, according to the German government, be against the principle of no-bailout principle (for the government) and against the principle of no-monetary financing (for the ECB). While the monetary financing argument remains a strong one for the ECB, the no-bailout argument looks much weaker, particularly in light of all rescue actions of the last years. As a consequence, some kind of OSI should not entirely be ruled out. However, it would not come for free for Greece. In our view, OSI or debt forgiveness would come with even more strings attached than the current programmes, leading to more and far-reaching loss of sovereignty. The core Eurozone countries would do everything to avoid the impression that OSI is relief for free. Otherwise, other Eurozone peripheral countries could be tempted to ask for the same.

Given the broader consequences of an OSI or debt forgiveness and the limited political appetite in several Eurozone parliaments for a third bailout package, filling the funding gap for Greece will again require some creativity. A possible way out, at least in the short-term, could be a combination of several options like lowering the interest rates on the first two Greek packages and front-loading parts of the funding of the second package. This could again kick the Greek can further down the road.

Wednesday, October 24, 2012

German Ifo drops again

Today’s leading indicators have added clear evidence that recessionary risks in the German economy are increasing. The Ifo index continued its recent downward trend in October, dropping to 100, from 101.4 in September. This is the sixth consecutive drop, bringing the Ifo index to its lowest level since February 2010. The drop was driven by a sharp deterioration of the current assessment component which dropped to 107.3, from 110.3. Earlier today, the PMIs painted a similar dire picture with the PMI manufacturing dropping to 45.7, from 47.4. The only upside in today’s Ifo report was that the expectation component remained unchanged.

The soft landing of the German economy continues. The sharp drop in the current assessment component shows that the good times are, at least for now, over. The industry’s safety net has become very fragile. Order books have become significantly thinner over the last months and orders at hand are currently as low as in October 2010. At the same time, companies have increased their inventories. A combination which clearly does not bode well for industrial production in the coming months.

The slowdown of the German economy is not only a consequence of the euro crisis but also of the global economic cooling. In fact, at least German exporters have started to decouple from the rest of the Eurozone. Over the last four years, the share of Eurozone countries in total German exports has dropped from around 43% to roughly 36%. Currently, Germany exports more to China than to Ireland, Greece, Portugal and Spain together. As long as the main economic blocs outside Europe can pick up steam again, Germany should be able to escape the current fate of most of its Eurozone peers.

With the ongoing slowdown, calls for fiscal stimulus are likely to become louder again. Not only for the sake of Eurozone rebalancing but also to support the German economy. Chancellor Merkel has not entirely ruled out additional stimulus. However, with the constitutional debt brake starting in 2016 and probable tensions within the government on how to spend it, any new stimulus should remain very limited. The tax cuts decided last year, amounting to roughly 0.1% GDP in both 2012 and 2013, illustrated the government’s preference for austerity rather than stimulus.

All in all, today’s Ifo index calls for a somewhat nuanced interpretation. The sharp drop in the current assessment component is a clear sign that the economy has entered contraction territory. Stabilised expectations, however, give hope that any contraction will not feel like a recession.

Tuesday, October 23, 2012

Germany discusses fiscal transfers

German politicians are currently discussing changes to the system of fiscal transfers. Domestic ideas could easily become a blueprint for the Eurozone.

Creditors wanting to reduce their payments, debtors hammering on social solidarity. No, it is not the Eurozone or the latest negotiations on the EU budget. It is the German states which are in the middle of renegotiating the system of fiscal transfers between the German States. The German system of fiscal transfers is highly complex and consists of different layers and ways horizontally and vertically, to redistribute wealth across states to ensure an equal minimum standard of living. In total, roughly 1.5% of German GDP is redistributed across the country per year. Now, the biggest part of these fiscal transfers, the so-called Laenderfinanzausgleich, ie, horizontal transfers between the individual states, is about to change.

Yesterday, Chancellor Merkel’s Christian-democratic party (CDU) agreed on possible significant changes to the system of fiscal transfers. Elements of the CDU’s proposal sound familiar to those who follow the Eurozone crisis: receiving states should fall under stricter supervision and control from the Stability Council (which was established in 2010). The Stability Council should also get more powers to intervene. Breaching the national debt brake should automatically lead to sanctions. In extreme cases, the Stability Council could receive the right to impose higher taxes in states not sticking to the debt brake. Moreover, transfers should also take demographic changes into account.

This is the first time that a reform proposal actually comes from all states and not from the federal level or just the paying states. Of course, it is only a first proposal from one party and it needs more to change the system of fiscal transfers. However, yesterday’s proposal at least shows that the discussion has started.

It might look like a small domestic news item, but yesterday’s agreement within Chancellor Merkel’s Christian-democratic party (CDU) does not only send a strong signal to other German parties but also to the rest of the Eurozone. The principle of conditional solidarity lives on and the idea of a powerful and independent control institution also sounds familiar. Maybe Merkel’s party did not only decide on domestic matters but also sent out a blueprint for the Eurozone.

Friday, October 19, 2012

EU Summit - Long night, few results

The first session of this week’s European Summit was again one of these red-eyed long nights with few concrete results. The new bank supervisory mechanism will come but will not be effective on 1 January 2013.

During a 10-hour marathon, European leaders discussed nothing less than the future of the monetary union or – to be more precise – EU president Van Rompuy’s report on possible paths to more Eurozone integration.

It was already obvious from the start that probably the only really fruitful discussion would be on the banking union. The principle agreement on common bank supervision had already been taken in June but negotiations on the exact implementation had slowed significantly recently with rising tensions between Eurozone countries on details and the possible starting date.

In a typical European compromise, which had something for everyone, European leaders last night called for “swift progress, with the objective of agreeing on the legislative framework by 1st of January 2013. Once this is agreed, the Single Supervisory Mechanism could probably be effectively operational in the course of 2013.” This compromise had the “1st of January 2013” that French president Hollande wanted and the “course of 2013” for German chancellor Merkel. Even if the countries can agree on a common legal framework before the end of the year, it would not become effective on 1st of January due to national implementation and ratification processes.

Details of the new bank supervision will still be worked out by finance ministers in the coming months. It seems clear that the ECB will play “a central part” and that all banks will fall under supervision. However, the phrase “the ECB should also be able to carry out supervision directly in a differentiated manner, meaning: using national supervisors in regular supervisory tasks as much as possible” shows that Germany succeeded in getting different treatments for some of its smaller banks and particularly the saving banks (Sparkassen).

The issue of direct bank recapitalization by the ESM once an effective supervisor has been established was also confirmed last night. However, operational criteria will still have to be developed which in our view implies that the issue of legacy assets will remain on the table. It looks unlikely that Germany, Finland and the Netherlands will give this one up during the upcoming negotiations.

The “vision-thing” on deeper integration of the monetary union will continue. Reading between the lines of Van Rompuy’s official statement, there does not seem to be a lot of agreement on anything. Strong emphasis on the measures already taken up to now is always a bad sign. It also shows that Germany’s latest idea of a super-Commissioner seems to be off the table. The only element explicitly mentioned last night by Van Rompuy was the issue of individual reform contracts. Other issues like a possible Eurozone budget or emergency fund are mentioned in code language and could still return in the next report to be presented at the EU summit in December.

All in all, the new single supervisory mechanism will come but direct bank recapitalization looks very unlikely any time soon. Moreover, all other big-picture issues for deeper Eurozone integration remain schematic. The integration pace remains slow. Last night’s marathon session again illustrated how cumbersome and difficult the European decision-making process is.

Tuesday, October 16, 2012

ZEW improves but still points to soft landing

Soft landing continues. The German ZEW index increased in October on the back of fading short-term tensions in the euro crisis. Nevertheless, the ZEW index which measures investors’ confidence still stands in negative territory, now -11.5, from -18.2 in September. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped for the fifth consecutive month.

Of course, the ZEW index is not the most credible leading indicator for the German economy. Particularly not during the last years as there has been a clear decoupling of financial market sentiment and the real economy; at least in Germany. Still, today’s ZEW index adds to the evidence of a soft, not a hard, landing of the German economy. The negative impact of the never-ending euro crisis and, even more important, of the global economic cooling should become visible in the second half of the year.

One year ahead of the next federal elections, the government is facing is challenging economic and political environment. The current slowdown has hardly reached the average German, but this could change. If unemployment starts to increase again in the coming months, new wage increases would not materialise due to increased global competition, and more attention would be paid to long-term issues linked to ageing (as for example, the recent debate about pensioners’ poverty, an increased number of working poor and the widening gap between rich and poor). This mix could put not only the German economy but also the entire Eurozone at the next crossroads. It is a mix which could eventually give rise to more Euroscepticism in Germany and could force both government and opposition parties to put their cards on the table, making the elections also a campaign on the future of the Eurozone. Latest statements by chancellor Merkel and finance minister Schäuble - hinting on more time for Greece, more powers for the budget Commissioner, a Eurozone set-up for the European Parliament, Treaty changes and even contemplating stimulus measures for the German economy – gave already some idea of their cards at hand.

Friday, October 12, 2012

European Day of Imaginativeness

A week ahead of the next EU Summit, new ideas, proposals and suggestions come thick and fast. However, the traditional jumble of ideas looks unlikely to already lead to concrete conclusions next week.

It was an eventful day yesterday. Several senior officials presented ideas, proposals and suggestions on possible next steps in the euro crisis. IMF head Christine Lagarde was the first, saying that the IMF was striving to save Greece, but that the country may need two years more than planned to get back on its own feet. Of course, Lagarde stated only the obvious, namely that the recessions in Eurozone peripheral countries currently undermined the austerity efforts, leading to a downward spiral – and not only in Greece. However, just one week ahead of the next EU summit and still awaiting the Troika report on Greece, Lagarde’s comments come at a sensitive moment.

Over the last weeks, there had already been signals that the Eurozone (including Germany) could be willing to give Greece more time. More time, however, would eventually also cost more money. According to market reports, a two-year delay of the austerity measures could lead to a financing gap of between €15bn and €30bn. Generally speaking, more time for Greece could be “bought” by two main options: a third bailout package or debt forgiveness. Within these boundaries, options like lower interest rates on the Greek loans, front-loading of the current bailout package and fiddling around with medium-term growth forecasts or a combination of all options could still be on the agenda.

Interestingly, German Finance Minister Schaeuble reacted immediately after Lagarde’s comments at the IMF/World Bank meetings, saying that debt forgiveness was not an issue. However, he did not comment on the possibility of giving Greece more time with its adjustment programme.

While Christine Lagarde increased pressure on Eurozone policymakers, not only to solve the Greek issue but also to seriously tackle the issue of Eurozone integration, EU President Van Rompuy revealed more details of his building blocks for more integration. At a speech in Brussels, Van Rompuy reiterated the three main areas of further integration: financial affairs, budgetary matters and economic policies. According to Van Rompuy, the immediate priority was progress in the banking sector with the well known Single Supervisory Mechanism. However, even if Van Rompuy called the efforts for a Single Supervisory Mechanism a sprint in the midst of an EMU marathon, this sprint looks more like a 800m run than a 100m sprint as principle agreement is still overshadowed by disagreement on many details.

The newest kid in the Eurozone integration town is the so-called fiscal capacity. This is a new buzzword which simply means a new Eurozone crisis fund to help suffering countries to fulfill all adjustment requirements. Eventually, this could become something like an unemployment compensation mechanism or a social solidarity mechanism. However, size, purpose, conditions and funding source are still more than unclear. Another new idea, which eventually could be linked to financial incentives, is to put structural reforms into binding contracts. Elsewhere yesterday, EP president Martin Schulz suggested that the next European elections could already see transnational front-runners.

All in all, the debate continues. Next week’s summit will probably not (yet) lead to any substantial conclusions; neither on Greece nor on further integration. Yesterday’s events nicely illustrated that Europe remains a region of thinkers and poets. There is clearly no lack of ideas, sometimes only of concrete decisions.

Wednesday, October 10, 2012

Toffe Peer piekt te vroeg

Ik beken, ik ben competitief. Mijn vrouw klaagt er vaak over. Waarom geniet ik niet rustig van de natuur op een mooie wandeltocht? Te langzaam en te weinig adrenaline. Iemand moet de eerste, snelste en beste zijn. Vervelend dat mijn zoon genetisch belast is. Hij kreeg voor zijn verjaardag het voetbalcomputerspel FIFA13 en veegde mij meteen van het veld. Waarop ik stiekem de geheime trucs van het spel op internet opzocht. Na een week 'keiharde training' won ik afgelopen weekend eindelijk eens. Maar zal ik mijn eenmalige hoogtepunt kunnen verlengen? Waarschijnlijk wacht mij het lot van Peer Steinbrück, de uitdager van Angela Merkel voor het Duitse kanselierschap. Even de roes van de verrassingsaanval, maar toch te vroeg gepiekt.

Velen vinden Steinbrück, de derde musketier van het SPD-leiderstrio, een verademing in de politiek. Zeker vergeleken met Merkel. Onverbloemde uitspraken, soms controversieel. Zijn opmars in de peilingen verrast dan ook niet. Steinbrück profileert zich als financieel expert, die de banken hard aanpakt en de crisis beter oplost dan Merkel. Een gevaarlijke strategie, met zijn politiek verleden. Als minister van Financiën en minister-president van Noord-Rijnland-Westfalen was hij verantwoordelijk voor het toezicht op West LB, de grote Landesbank die faalde. Als minister van Financiën in de eerste regering-Merkel bezwoer hij na de val van Lehman Brothers dat de Duitse banken en de economie robuust waren. De crisis was Amerikaans. Maar even later moest Hypo Real Estate gered worden, en belandde de Duitse economie in een zware recessie.

Steinbrück mag geen gevaar zijn voor Merkel, tenzij hij zich in de eurocrisis van haar kan onderscheiden. Meer tijd voor Griekenland, meer politieke unie, een schulddelgingsfonds en, wie weet, eurobonds. Merkel kennende, zal zij die onderwerpen de komende maanden elegant overnemen, alsof ze altijd al van haar waren. Slecht nieuws voor Steinbrück, maar goed nieuws voor Europa. Door Steinbrücks komst zal Merkel iets meer in haar kaarten moeten laten kijken en een socialer gezicht krijgen.

Peer Steinbrück wacht in de politieke arena mogelijk hetzelfde lot als mij, thuis met FIFA13. Mijn zoon heeft namelijk iets van Merkel en heeft mijn moeizaam verworven trucs in een fractie van een seconde al afgekeken. Nu verlies ik weer. Binnen een jaar heeft Steinbrück misschien tijd om met mij een partijtje FIFA13 te spelen.

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

Monday, October 8, 2012

German IP drops in August

Limited slowdown. German industrial production dropped by 0.5% MoM in August, providing further evidence of the gradual slowing of the economy. In annual growth terms, industrial production was up by 0.8%. The drop was equally spread across most sectors. Only the production of energy and consumer goods increased in August. Production in the construction sector saw a drop by 2.8% MoM.

Earlier today, German exports surprised positively and increased by 2.4% MoM in August. As imports only increased by 0.3% MoM, the seasonally-adjusted trade balance widened to 18.3bn euro, from 16.3bn euro in July. As so often, exports to non-European countries were the most important driver. Exports to non-European countries were up by 13% YoY and the share of exports to other Eurozone countries is constantly dropping. In August, only 33% of all German exports went to Eurozone peers.

The available hard data still illustrates a relative crisis-resistance of the German economy. The sharp dop of almost all confidence indicators is not yet reflected in the data. Although a contraction of the economy in Q3 is still possible, strong exports and stable consumption should make any contraction a mild one. Unless, of course, things worsened dramatically in August.

Looking ahead, however, the soft landing of the German economy should continue. The industry’s safety net of low inventories and richly filled order books has become very thin over the summer months. Inventories are still relatively low, at least when compared with the start of earlier recessions. However, the currently widening differences between increasing inventories and dropping orders at hand is similar to the trends observed in 2001 and 2008.

Today’s data illustrate the relative strength of the German economy. However, the data also give the impression that the German industry is in the middle of a clearance sale. A mix of surging exports, dropping orders and declining industrial production does not bode well for the future.

Sunday, October 7, 2012

Hase und Igel in Europa

Letter from Brussels – Hase und Igel in Europa

Man hat sich mittlerweile daran gewöhnt, dass die EZB die Feuerwehr in der Euro-Krise ist. Etliche Male hat sie für wenig entscheidungsfreudige Politiker im Wettlauf gegen die Finanzmärkte die Kohlen aus dem Feuer geholt. Aber jetzt, wo die Gefahr eines schnellen Ende des Euroraums erst einmal gebannt ist, entwickelt sich ein ganz neuer Wettlauf: eine europäische Version von Hase und Igel.

Die EZB mit Mario Draghi ist ganz deutlich der Hase. Am Donnerstag hat Draghi noch einmal unterstrichen, dass die EZB weiterhin bereit steht, notleidenden Staaten mit Anleihekäufen unter die Arme zu greifen, wenn sich diese Staaten unter den Rettungsschirm begeben. Kurzfristig ist der Euro damit gerettet, aber das langfristige Überleben – und das weiß auch Draghi - kann nur die Politik garantieren.

Die europäische Politik ruht sich jedoch zu häufig im Schatten des Aktionismus der EZB aus. Nach jeder Großtat der EZB scheint das Tempo bei der Durchführung wichtiger nationaler und europäischer Reformen ins Stocken zu geraten. Letztes Beispiel ist der große Masterplan von EU Ratspräsident Van Rompuy. Bis zum Ende des Jahres soll ein detaillierter Fahrplan für mehr Integration stehen. Bisher sind diese Pläne jedoch nur ein Sammelsurium an Ideen. Bankenunion, zentraler Nothaushalt, mehr Koordination. Wichtige Elemente werden angedeutet, bleiben jedoch sehr vage und hinter jeder Idee verstecktsich eine Vielfalt an Kontroversen zwischen Euroländern. Der Masterplan ist im Augenblick nur eine Wunschliste.

Anders als im Märchen laufen Hase und Igel in Europa nicht gegen- sondern miteinander. Es ist der gemeinsame Wettlauf für das Überleben der Währungsunion. Der Hase hat dabei deutlich seine Belastungsgrenze erreicht. Der Igel muss sich ein bisschen anstrengen, dass den Hasen nicht das gleiche Schicksal ereilt wie im Märchen. Da bricht er nämlich zusammen und stirbt.

Dieser Artikel erschien eher in der Euro am Sonntag in der Rubrik "Letter from..."

Thursday, October 4, 2012

Twiddling thumbs in Ljubljana

At today’s meeting in Slovenia, the ECB left interest rates unchanged. Next steps in the Eurozone crisis will again have to come from governments.

The ECB’s macro-economic assessment was almost a verbatim copy of last month. As regards economic growth, the ECB just confirmed what everyone knows: “economic growth in the euro area is expected to remain weak”. The economy is expected “to recover only very gradually”. The sentence that growth should “remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery” indicates that the ECB is prepared for a long period of below-trend growth in the Eurozone. As regards inflation, the latest increase in headline inflation was, according to the ECB, not a threat to medium-term price stability. Risks to price stability remained balanced. Against this still dire economic outlook, a rate cut in the coming months is still possible, although the ECB currently rather seems to be banking on the non-conditional measures to do the job.

As expected, a large part of the press conference was again dedicated to the OMT programme and some clarifications. ECB president Draghi was obviously satisfied with the positive market reaction in September. He reiterated that the “euro is irreversible”. Besides the well-known repetitions of the conditionality principle for the OMT, Draghi mentioned two new details of the OMT: First, on the issue of whether countries already in a bailout programme could also be subject of bond purchases, Draghi said that the OMT could not be applied “until full market access will be obtained”. This was slightly different from last month’s wording which said “[OMT] may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.” It remains unclear whether the ECB would be willing to start the OMT for Ireland and, particularly, Portugal. Second, according to Draghi the ECB would not purchase bonds under the OMT programme while a country is under review. Given the length of earlier review periods, this clearly decreases chances that Greece could ever be subject of OMT bond purchases.

Today’s ECB press conference was one of the many moments in which the ECB tried to play the ball back to politicians. Draghi ducked the question on legacy assets in future bank recapitalisations by the ESM and also repeated his calls upon governments to continue implementing austerity measures and structural reforms. Interestingly, Draghi was less outspoken on the bigger picture issue of further Eurozone integration. It seems as if Draghi has dropped the “vision thing” he still had been pushing before the summer. A clear sign that Draghi has become more realistic, acknowledging that implementing some elements of a later vision thing in the coming months would already be an enormous achievement.

All in all, the ECB realises that there is hardly anything they can do at this juncture. With the OMT, the ECB has tackled and exorcised fears of an imminent Eurozone break-up. More monetary stimulus, standard or non-standard, to support growth is still in the offing but the fundamental work has to be done by governments. For the time being, the ECB can lean back, watch and twiddle thumbs.