Brexit - ein schrecklich historischer Tag

Für einen bekennenden Europäer wie mich aber auch ein schrecklicher Tag. Auch wenn das offizielle Endergebnis noch nicht da ist, scheint das Brexit-Lager uneinholbar vorne zu liegen. Zusammen mit den Kollegen aus London werden wir am frühen Vormittag eine längere Research Note veröffentlichen. Bevor diese kommt, hier schon eine kurze Stellungnahme. Es sieht so aus, als ob Europas schlimmster Alptraum Wahrheit geworden ist. Sollte sich das Ergebnis bewahrheiten, werden die wirtschaftlichen und politischen Folgen noch lange zu fühlen sein. Die erste Marktreaktion gibt schon einen guten Vorgeschmack. Es steht ein langer, schwieriger und dreckiger Scheidungsprozess an. Es wird nicht nur schwierige Verhandlungen mit Großbritannien geben. Europa wird sich auch mit sich selbst beschäftigen müssen. Nach dem heutigen Tag wird Europa nie mehr so sein wie bisher. Der Geist des Populismus und antieuropäischer Haltungen ist aus der Flasche entwichen und wird nur sehr schwer einzufangen sein. Europa befindet sich in einer existentiellen, in einer Identitätskrise. Nach dem Brexit ist vor der nächsten Exit-Gefahr. Schon jetzt gibt es Spekulationen über mögliche EU-Abstimmungen in Frankreich und den Niederlanden; zwei Gründungsmitglieder der EU. Die Wahrscheinlichkeit einer schleichenden Desintegration der EU und auch der Eurozone nimmt zu. Die Gefahr, dass die nächste Generation, unsere Kinder, diese Scherben aufräumen muss, auch. Europa muss die Kritik und Skepsis in Teilen der Bevölkerung ernst nehmen. Die aktuelle Europa-Diskussion dreht sich fast immer nur um ‚mehr oder weniger’ Europa. Europa braucht eine neue differenzierte Diskussion über die Zukunft Europas. Eine Diskussion, in der positive Alternativen aufgezeigt und die Ängste ernst genommen werden. Eine Diskussion, die nicht sich nicht mehr um ‚mehr oder weniger’ drehen sollte, sondern um ‚mehr und weniger’. So könnte ein historisch schrecklicher Tag irgendwann vielleicht doch einmal als Anfang eines besseren Europas in den Geschichtsbüchern stehen. Das ist aber vielleicht nur der Traum eines verträumten Europäers.

Another 'yes but...' from Karlsruhe

The German Constitutional Court just released its final verdict in the case against the ECB’s OMT programme. The Court rejects the complaint but does only give half-green light for OMT. < Summary Line Germany’s Constitutional Court just released its ruling in the case against the ECB’s OMT programme. The Court officially rejects the complaint against OMT. However, the details of the Court’s ruling suggest that rejecting a complaint does not necessarily mean that the Court embraces OMT. Although we are no legal experts, the bottom line of the Court’s ruling seem to be: the Court grudgingly acknowledges the ECB’s independence on monetary policy matters and that European legal matters do not fall into the responsibility of the German Court. Moreover, the Bundesbank can only participate in the OMT under certain conditions. Remember, the OMT programme has been the ECB’s strongest weapon during the peak times of the euro crisis and it is a programme which has never cost a single euro. The OMT has been the fundament under Mario Draghi’s famous “whatever it takes” words. It is the programme with which the ECB announced to buy government bonds of crisis-stressed countries under certain conditions, as e.g. that the country needs be in a bailout programme. The “whatever it takes” words combined with OMT were a game changer during the darkest times of the euro crisis, giving financial markets the impression that the ECB could be a last lender of resort for the Eurozone. Consequently, spreads between government bond yields narrowed again. But the legality of the programme has been challenged by 37,000 German plaintiffs who argue that OMT violates the EU’s prohibition on the “monetary financing” of governments. Last year, the German Court had asked the European Court of Justice for legal advice (which is different from delegating the entire case to the European level). The ECJ’s advice was clearly supportive for the ECB. With today’s final ruling, the German Constitutional Court confirms the ECJ’s ruling but also indirectly criticizes the ECJ for not having investigated deep enough whether ECB’s own assessment on need for OMT was justified. In its ruling, the German Court states that it took the ECB’s own assessment for granted. While the German Court has rejected the case against the OMT, it still has put conditions on the Bundesbank’s participation. Namely: bond purchases should be limited in volume and should not be announced beforehand. Moreover, purchased bonds should only held until maturity in exceptional cases. The entire case has not only brought German opposition against the ECB’s non-standard monetary policy measures into court rooms, it has also been a nice illustration of the ongoing struggle and difficulties in Europe and the Eurozone to delegate powers and responsibility from the national to the European level. Similar to the British referendum in two days from now, the German Court’s ruling had the potential to shake the European Union or at least the monetary union to its very foundations. Fortunately, it did not. This ruling on a programme which has never ever been used gives the ECB enough room and backing to continue with QE and to stand ready to eventually fight any emergencies on financial markets in case of a Brexit-vote on Friday morning. At the same time, however, the ruling was not convincing or strict enough that it will stop German opposition against current ECB policies or prevent new lawsuits against the ECB. It was a typical “yes, but…” ruling from Karlsruhe. Some could even be tempted to call the Court a sore loser who is still struggling to find a balance between European and national interests and powers. Clearly not the only one in Europe currently.

Weak revival of German exports

Some relief but no reason to cheer. February trade data just showed that the German export sector still struggles to gain momentum. After four declines in the last six months, German exports increased by 1.3% MoM in February. As imports only increased by 0.4% MoM, from 1.3% MoM in January, the seasonally-adjusted trade balance improved to 20.3 bn euro, from 13.4 bn in January. German exports have lost parts of their magic and strength. In the past always a reliable growth engine, net exports on average did not contribute anything to quarterly GDP growth over the last two years. In 2015, net exports even were a drag on growth. So much about export world champion. The weaker euro was only partly able to cushion the negative impact from weaker external demand, particularly from China and oil-exporting countries. The negative impact from low oil prices on the German economy through weaker exports is mainly felt in the manufacturing sector. Looking ahead, it does not look as if exports would quickly return as a powerful growth engine. Foreign orders have dropped by more than 7% since last summer, further reflecting a broader weakness in Germany’s main trading partners. Moreover, the tailwinds of the weak currency are also fading away. Since late-November, the euro has appreciated by more than 6 ½% vis-à-vis the US dollar. At the same time, the trade-weighted exchange rate appreciated by some 5%. This strengthening of the exchange rate should also affect German exports in the coming months. With strong consumption, a booming construction sector but stagnating industry and exports as well as a reprimand from international institutions to finally step up reform efforts, the Eurozone’s largest economy is losing some of its luster. Admittedly, it is a bit tongue in cheek, but after this week’s macro data, one could even start to think the Eurozone periphery these days starts in Germany.

German Ifo surprises in March

It’s hard to comment on economic sentiment indicators, while watching horrible scenes from my former home city. What initially was supposed to be a German economic sentiment day, with releases of the three most prominent confidence indicators on one day, has all of a sudden and tragically become a sad day for Europe. Still, let’s give it a try to return to economics for a minute. Germany’s most prominent indicator, the just released Ifo index, rebounded in March to 106.7, from 105.7 in February. Both, the current assessment and the expectations component increased in March; showing that German businesses seem to have shaken off fears of long-lasting global slowdown. While commentators are currently heatedly discussing the risks of a wide-spread global slowdown, the German economy shows solid resistance. While soft indicators have disappointed in recent months, hard data have rebounded at the start of the year. Actually, hard data – except for exports - in January has actually surprised to the upside and industrial production, construction, car registrations and retail sales were actually higher than in the final quarter of 2015. At the same time, the continued strength of the service sector seems to make up for a more structural slowdown in industrial production in the wake of weaker demand from too many important export destinations. Today’s Ifo index adds to increased optimism. The Ifo was the second German sentiment indicator released today. Earlier this morning, the PMI remained unchanged at 54.1, pointing to continued growth in the first quarter. At 11am CET, the ZEW will close this German sentiment day, shedding some first light on how investors assess the ECB’s latest monetary policy action and whether or not they still believe in Mario Draghi’s magic. On any ordinary day, today’s German sentiment data would have been a reason for moderate optimism. Despite ongoing warnings and fears of a derailing of the global economy, the Eurozone’s largest economy is still going strongly. However, this is definitely and sadly not an ordinary day anymore.

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.

ECB meeting - It ain't over till it's over

What was expected to be a dull first meeting of the year, turned out to be an exciting ECB meeting with ECB president Mario Draghi opening the door widely for new ECB action in March. While today’s ECB meeting will again feed bold speculations about what could happen in March, the question remains whether Draghi will really be able to deliver on his promise. No action today but probably in March. This is the bottom line of today’s ECB meeting. Interest rates and all else were kept on hold. However, ECB president Draghi sounded much more concerned about the outlook for the Eurozone economy, both in terms of growth and inflation, than six weeks ago. Draghi explicitly mentioned the renewed sharp drop in oil prices, the appreciation of the euro (let’s not forget, the side-effect of Draghi’s monetary policy own goal in December) and the slowdown of emerging markets and China. In addition, Draghi mentioned the volatility in financial and commodity markets as one of the factors behind the increase in downside risks since the start of the new year. Against this background, Draghi sent several strong messages, hinting at new ECB action at the next ECB meeting. First of all, Draghi reintroduced the concept of explicit forward guidance by stating that “we expect them [key ECB interest rates] to remain at present or lower levels for an extended period of time”. In our view a clear indication that despite having announced the lower bound for interest rates several times of the last years, the ECB is again considering cutting rates. Moreover, an even stronger hint at new action was given with the sentence “it will therefore be necessary to review and possible reconsider our monetary policy stance at our next meeting in early March”. According to Draghi, “work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed”. A bit of a surprise as we thought that all possible options had already been on the table back in December. Financial markets reacted enthusiastically to Draghi’s hints and the euro exchange rate dropped immediately. The question, however, is whether and what the ECB can really deliver in March. Let’s not forget that the outcome of the December meeting looked like a compromise between doves and hawks, with the ECB eventually delivering less than markets had expected. Admittedly, at least the external environment for the Eurozone economy has worsened since the December meeting but it is unclear what the ECB can do to tackle low prices. It is hard to imagine that oil purchases will be on the agenda in March. Nevertheless, unless oil prices rebound in the coming weeks or the Eurozone economy surprises to the upside, it will again be difficult for the ECB not to deliver with new action in March. Judging from today’s comments, the most likely common denominator for both hawks and doves should be another rate cut (perhaps the idea of a two-tier deposit rate will be dug out again), possibly combined by another marginal fine-tuning of QE. All in all, today’s ECB meeting shows that Mario Draghi is always in for a good surprise. Every time it looked as if the ECB was done with its stimulus and willing to wait until all measures have had enough time to unfold their full impact, Draghi puts another log on the fire. Even if the big question remains whether Draghi can actually make markets’ new dreams come true. We might not hear Draghi sing at a press conference but for now Draghi has today again reminded everyone that “it ain’t over till it’s over”.

Solid recovery continues: German GDP grew 1.5% in 2015

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.5% in 2015 (in calendar-adjusted terms), from 1.6% in 2014. Without working day adjustments, German GDP increased by 1.7%, from 1.6%. In our view, this outcome suggests that the German economy has probably grown by some 0.4% QoQ in the fourth quarter. However, as no hard data for December has been available so far and the statistical office normal uses extrapolations and historical patterns for its fourth quarter estimates, some downward revisions cannot be excluded. Let’s not forget that the vacation period could have had a negative impact on production in December. Moreover, the statistical office also released a first estimate of Germany’s 2015 fiscal balance, providing more arguments for the critics of too weak German public investment. For the first time since 1961, the German government recorded a fiscal surplus in two consecutive years. According to the statistical office, the fiscal surplus came in at 0.5% of GDP in 2015, from 0.6% GDP in 2014. German austerity fetishists will love it. Already yesterday, the German government reported a federal fiscal surplus, which at the federal level came in at 12bn euro, instead of the initially planned 5bn euro. Previously, the government coalition had already decided to transfer any surplus from the 2015 budget entirely into the 2016 budget and not using the surplus to reduce government debt. The funds are needed to finance the costs of the refugee inflow, which the government has currently estimated at around 8bn euro. The reported surplus now offers additional financing leeway for another 7bn euro. While initially this additional fiscal room for maneuver will be used as a buffer for the refugee costs, it is obviously also grist to the mills of proponents for more public investment. Returning to GDP data, today’s numbers almost close the economic year 2015 for Germany. It was yet another year in which the German economy defied earlier swan songs and, despite many headwinds like the Greek crisis, the slowdown in emerging markets and China and increased geopolitical uncertainties, continued the recovery. The year 2015 clearly marks an important step in the rebalancing of the German economy, as private consumption turned out to be an important growth driver (contributing 1.0 percentage points to growth). Still, despite all talks about the strength of the German economy, it took until 2015 before the current expansion has finally become stronger than the last one between 2004 and 2008. Moreover, it would still need at least two more solid years of growth before the cycle between 1994 and 2000 could be equaled. Looking ahead, the two-speeded recovery, with strong consumption and services on the one hand and sluggish industrial production and exports on the other hand, should continue in 2016. As regards the domestic part of the economy, the year 2016 should bring at least a short-term consumptive stimulus from the refugee inflow and increased government consumption. At the same time, low interest rates, low inflation and high employment should further boost growth. As regards the external and industrial part of the economy, high inventories, subdued order books and weaknesses in several important export markets suggest that the German export sector could soon simply face too many headwinds to prolong the recent success story. All in all, the German economy has once again defied many external headwinds and performed another solid growth year in 2015. However, there are at least two caveats to today’s positive data: firstly, after several years of stellar performances (at least vis-à-vis the rest of the Eurozone), the German economy has returned to normality, hardly outperforming the Eurozone any longer. And secondly, without any new structural reforms and investments it is hard to see any sharp acceleration of the economy any time soon. This might be as good as it gets. Therefore, any celebrations and self-adulations should remain extremely modest.

Column: De sterren voor 2016

Zelfspot is niet de meest opvallende karaktertrek van Duitsers. Zelfs na ruim een jaar weer in Duitsland te zijn, is de humorcultuurschok voor mij nog altijd wennen. Economen moeten hier het liefst ‘Herr Professor’ heten en bloedserieuze analyses voorstellen. Bij voorkeur zwaar aangezet, zoals ‘de vluchtelingen zijn de ondergang van Duitsland’ of ‘Mario Draghi rooft het spaargeld van alle Duitsers’. Dat heeft gewicht. Alleen is het jammer dat aan het eind van elk jaar blijkt dat ook humorloze humor geen garantie biedt voor trefzekere voorspellingen. Daarom nu mijn alternatieve poging om met on-Duitse humor een blik op het volgende jaar te wagen. Te beginnen met Griekenland. Door de aanhoudende politieke chaos, de uitblijvende groei en de volledige uitverkoop van het land kantelt de sfeer onder de Griekse bevolking. De Grieken willen definitief uit de eurozone. Alexis Tsipras wint ruimschoots het nieuwe referendum over de grexit. Deze keer houdt hij zijn verkiezingsbelofte. De Duitse bondskanselier Wolfgang Schäuble, na de zelfstandigheid van Beieren en de val van Merkel de nieuwe regeringsleider van een CDU/Groenen-coalitie, feliciteert Tsipras met de woorden: ‘Sie sind geschafft.’ Als 'wederopbouw Zuid' stuurt Schäuble nog het oude bestuur van Volkswagen en het organisatiecomité van het WK voetbal 2006 naar Griekenland. Ze moeten er bekijken of de Olympische Spelen niet permanent in Griekenland kunnen plaatsvinden en of ze geen milieuvriendelijke investeringen voor de Grieken kunnen binnenhalen. Op hetzelfde moment blijkt dat elke Chinees aan vier iPhonekopieën echt genoeg heeft en dat de consumptie instort. Waardoor de wereldeconomie in een recessie belandt. Na zijn verkiezingsoverwinning kondigt de nieuwe Amerikaanse president Donald Trump onmiddellijk een ongekend stimuleringspakket voor 2017 aan. In elke Amerikaanse stad, al is die nog zo klein, worden wolkenkrabbers en casino’s gebouwd. Trump overweegt ook om wolkenkrabbers uit Londen naar de VS te verhuizen, vanwege de enorme leegstand in de Londense kantoorgebouwen na de brexit. In het Midden-Oosten begint een valutaoorlog. Nadat de prijs van olie onder 20 dollar per vat is gedaald, geven de olie-exporterende landen de koppeling van hun eigen munt aan de dollar op. ECB-president Mario Draghi reageert onmiddellijk met QE3 en QE4. Tegelijkertijd publiceert Commissie-voorzitter Jean-Claude Juncker alweer een nieuw investeringsplan. Dit keer voor een Europees ruimtevaartprogramma. Als er eindelijk leven op andere planeten wordt ontdekt, kan dat de eurozone, door de nieuwe exportmarkt, eindelijk de broodnodige duw uit de recessie geven. Zoals de lezer wel merkt, heeft de aloude Duitse dijenkletshumor mij ook al aangestoken en neemt deze column het glazenbolkijken voor 2016 niet serieus. Echt, wie heeft er eind 2014 de grootste crisissen van 2015 voorspeld? Maar zoals bij elke goede grap zit er misschien toch een druppel waarheid in… Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

ECB gifts disappoint after unwrapping

Santa Mario did not turn into the Grinch, the Christmas monster. However, his long-awaited early Christmas afternoon left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve. At its long-awaited meeting, the ECB today cut the deposit rate to -0.3%, from -0.2%, while leaving all other interest rates unchanged. In addition, the ECB decided to extend the deadline of QE purchases to at least until March 2017, from earlier September 2016, and to introduce other measures, broadening the scope of the monthly purchases. For the first time in a long while, ECB president Draghi underachieved and delivered less than the market consensus had expected. As a result, the euro appreciated and bond yields increased immediately after the policy decision. So what exactly did the ECB decide? Basically five things: i) a 10bp cut in the deposit rate; ii) an extension of the formal deadline of monthly QE purchases to at least March 2017, from earlier September 2016; iii) reinvestments of the principal payments of the securities purchased “for as long as necessary”; iv) the inclusion of regional and local government bonds in the monthly purchases; and v) an extension of fixed-rate tender procedure and full allotment for refinancing operation until the end of 2017. What the ECB did not announce was a bigger cut of the deposit rate, a cut in the refi rate or an increase of the monthly asset purchases. The discrepancy between what the ECB did and did not announce raises the question of the ECB’s ratio behind it and the arguments. Looking at the ECB’s macro assessment, it looks as if almost unchanged growth and inflation forecasts as well as a positive assessment of the impact from QE up to now laid the grounds for the ECB’s rather reserved policy reaction. In more detail, ECB staff now expects GDP growth to come in at 1.7% next year (unchanged) and 1.9% (from 1.8% in September) in 2017 and inflation to accelerate to 1% (from 1.1% in September) next year and 1.6% (from 1.7%) in 2017. The underlying story is still the same one of a gradual recovery with downside risks to growth and inflation. According to Mario Draghi, all ECB measures taken so far have increased the inflation forecasts by 0.5 percentage points for 2016 and 0.3 percentage points for 2017. They also boosted GDP by 1 percentage point over the period 2015 to 2017. Moreover, the ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought and that the ECB itself was surprised by the latest resilience of the Eurozone economy and the estimated positive impact of QE so far. Looking ahead, today’s decision still leaves all doors open for more monetary stimulus, in case the outlook for both growth and inflation were to worsen again. In the short term, however, it leaves the destiny of the euro exchange rate mainly in the hands of the Fed. For ECB watchers, today’s meeting was an important lesson not to take Draghi’s overachieving for granted. All in all, today’s ECB meeting, which was expected as an early Christmas present party, turned out to be a bit of a disappointment, maybe better matching the current Zeitgeist in the Eurozone: no copious and excessive gift party but more introvert modesty.

November Ifo beats estimates

An island of happiness after all? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, despite not so positive hard data and new uncertainties stemming from the refugee influx and latest events in Paris, German businesses remain a bunch of optimists. Germany’s most prominent leading indicator, the just released Ifo index, increased to 109.0 in November, from 108.2 in October, offsetting last month’s drop. Interestingly, both the current assessment and the expectations component increased. In fact, expectations increased to their highest level since May last year. Today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown as well as new uncertainty stemming from the Paris events. Still, the positive Ifo reading is a bit of a conundrum as it is not entirely matched by positive hard data. In our view, hard data since the start of the year showed that the German industry is actually going through rough times. Latest industrial production data suggested that the summer slump was more than only vacation-driven. In fact, the industry has underperformed since the beginning of the year, being confronted with several external headwinds. Currently, an additional headwind could be low, or better too low, oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, latest survey data send opposing signals. While latest PMI and Ifo data give rise to new optimism, the combination of inventory build-up and dropping new orders has clearly weakened the normally strong safety net for the German industry. Moreover, the facts that capacity utilization remains close to its historical average and companies do hardly see equipment as a constraint to production suggest that a self-driven investment spurt is currently not in the cards. It will take some more weeks before the final verdict can be made on which survey indicator actually is the best growth predictor. Currently, markets are not only watching German data to get insights on the German economy but also to get an idea of what the ECB can and will do at next week’s meeting. While stronger-than-expected confidence indicators could motivate some ECB members to pitch the old Prince song “When doves cry” and argue against new ECB action, Draghi’s determination at the October meeting combined with continued underlying economic weaknesses and the absence of any inflationary pressure should be decisive in launching QE2.

German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

Rethinking the overachiever

Mario Draghi’s bold comments have raised the bar for the December meeting to a very high level. What could the ECB actually do? Even after some sleep and several internal brainstormings, it is not fully clear to us why ECB Draghi went as far as he did with his comments during Thursday’s ECB press conference. In our view, it would have been more than sufficient to use the phrase “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”. This alone would have been a clear opener for more monetary action in December. Instead, Draghi himself brought forward the possibility of lowering the deposit rate, mentioned that some Governing Council members had already been in favour of more action at the Thursday meeting and hinted at new, unprecedented action by stating that the Governing Council had tasked internal committees to investigate further measures. All in all, a “work-and-assess” mode that has put market expectations to a (too) high level. The question of why Draghi chose for such boldness will remain unanswered. Is the ECB just overly concerned or are we back in the good old days when central banks had exclusive insight information on markets and economies? Hopefully, the meeting minutes will shed some light on these questions. Looking ahead, all eyes will now be on the 3 December meeting. In our view, despite all boldness, new action is not a done deal, yet. It will be conditional on the next batch of ECB staff projections and, particularly, the inflation forecasts for headline and core inflation in 2017 (1.7% and 1.6% respectively in the September forecasts). Admittedly, inactivity in December would clearly be counterproductive and would lead to a negative market reaction, eventually still forcing the ECB to act. In short, Draghi’s boldness has put the ECB into a position from which it will be very hard to escape without any new action. Based on Draghi’s comments on Thursday, what is the most likely action the ECB can deliver on 3 December? Given that not all members of the ECB’s Governing Council seem keen on stepping up QE, as they either deem it too early or simply ineffective (just think of Liikanen or Weidmann), returning to traditional monetary policy instruments seems like the most viable option. A cut of the deposit rate by 5-10 bp and a cut of the refi rate to zero could be easier digested by the ECB’s own QE critics. The fact that Draghi had several prepared statements at the Thursday meeting on why a rate cut would not lead to a credibility loss (despite last year’s comments that the ECB had reached the lower bound) and the focus on real not nominal rates, suggests that the ECB did already have a very intense discussion on this option. Draghi’s comments that the Governing Council had tasked all relevant committee to investigate other possible measures suggests that the ECB itself is not fully concerned that a simple “more of the same” will do the trick. Stepping up the current QE by either increasing the monthly size or the length of the programme is on the one hand hard to achieve (given that markets have already dried up significantly) and on the other hand will probably not have a huge impact on the economy. In our view, however, it is doubtful that the same committee which prepared QE last year will now all of a sudden find completely new measures no one else had ever thought about before. In theory, possible options might be purchases of corporate bonds, stocks or government bonds of non-Eurozone countries. Is it likely? In our view, not (yet). Notwithstanding the above, the ECB might still be tempted to deliver something on QE. Just in order to meet high market expectations. In this regard, some minor, rather cosmetical, changes to the current QE programme should not be excluded. An increase of the monthly size by 5 to 10bn and an extension of the minimum deadline to January 2017, instead of the current September 2016. The ECB might even consider dropping the reference to a precise minimum deadline. At first glance, this would make the programme look more open-ended than it currently is. However, at second glance, such a move could backfire in a situation in which inflation expectations start to increase before September 2016. Another more elegant way to do something more in terms of QE (probably preferred by the members of the Governing Council more critical of the programme) would be lowering the minimum yield at which the ECB can purchase bond (currently -20 bp), in line with the rate cut on the deposit facility (given the fact that it is not entirely clear whether there is an automatic link between deposit rate and the rate limit for QE purchases). That could also shift the longer end of the yield curve downwards. In the same vein, a further rate cut on TLTROs could be considered. All in all, a rate cut (also applied to the different types of unconventional monetary policy instruments), possibly combined with some cosmetic tweaking of QE look like the most likely next step for the ECB. Will it help? The ECB thinks it does. And, indeed, judging from Thursday’s market reaction, it should – at least initially – weaken the euro exchange rate. However, as it always needs two to tango, this ECB strategy would only work if the Fed would really start hiking interest rates. In this regard, any market and ECB enthusiasm could easily end with a hangover two weeks later when the Fed meets on 16 December.

German Ifo drops in October

Surprised but not frightened? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, the reaction can be summarized as impressed but not frightened. Germany’s most prominent leading indicator, the just released Ifo index dropped to 108.2 in October, from 108.5 in September. The first drop since June this year. Interestingly, the drop was exclusively driven by a weaker assessment of the current situation. The expectation component, on the other side, increased to 103.8, from 103.3, continuing its recent positive trend and actually reaching the highest level since June last year. Of course, one should not interpret too much in a single confidence indicator but today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown. Despite these external uncertainties and regular concerns about the real strength of the German economy, German business remain highly optimistic. There are two possible explanations for this trend: either German businesses are naive optimists or ice-cold realists, sticking to the facts. In our view, there are many arguments in favour of the latter. Admittedly, the latest drop in new orders and shrining order books has dented some optimism on the outlook for the German industry. However, continued growth in the service sector, strong domestic demand and an outside world that might be slowing but is definitely not falling off a cliff, should keep the German economy on the sunny side. Finally, let’s not forget that the German economy is one of the largest beneficiaries of the ECB QE programme, taking immediate support from a weak euro and low interest rates. Needless to say, not all is well in the land of cars. The lack of new structural reforms, the unfinished energy reform and too few domestic investments will eventually hit the economy. Moreover, the inflow of refugees, while being short-term stimulus for domestic demand, is the biggest challenge for Germany in decades, posing both enormous risks and opportunities, but in anyway asking for unprecedented and lasting flexibility of both the society and the economy. All in all, today’s Ifo index shows that the German economy is not totally immune against external slowdowns and internal scandals. However, there is no reason at all to fear an abrupt slowdown of the Eurozone’s biggest economy

European Commission presents proposals for further reforms of EMU

At least they are trying. Today, the European Commission presented its plans on how to get the monetary union on a more sustainable footing. The Commission released a so-called policy package, trying to bring parts of the “Five Presidents’ Report” into life. To be clear, the Commission aims at implementation by mid-2017. Afterwards, stage 2 should start, which according to the Commission would include “more far-reaching measures”, which will “inevitably involve sharing more sovereignty and solidarity”. Even though the Commission states that its proposals are the result of extensive consultations with Eurozone member states, the European Parliament and stakeholders (whoever this might be), past experience has shown that these proposals are likely to be watered down in the coming months. Looking at the details, the Commission has tried to address all relevant issues, which would make the monetary union more sustainable: increase competitiveness, more supervision of national fiscal policies, a fully-fledged banking union and a common Eurozone voice in international for a. The concrete proposals, however, suggest that the courage to really make a huge step ahead was missing (or probably better said: the room was simply not given by national governments). Concrete, the Commission proposes national Competitiveness Boards, a European Fiscal Board, a more streamlined process for setting up national budgets combined with European supervision, the full implementation of the Bank Recovery and Resolution Directive and the directive on Deposit-guarantee schemes and, last but not least, a common representation of the Eurozone at the IMF. From a negative angle, the Commission proposals are mainly of a cosmetical nature and have a high “old wine in new skins” portion. Only the common representation is new and groundbreaking. Setting up new boards or committees could be regarded as window-dressing and it is doubtful that this really leads to stricter implementation of necessary reforms. The intentions are good but who does still remember the fiscal compact or national debt-brakes? From a positive angle and to give the Commission some credit, however, they at least tried. The Commission’s proposals are a very gentle, probably too gentle, push towards more political union. It is probably already the smallest common denominator across national governments. Let’s face it, the appetite for quantum leaps towards a political union is currently simply not strong enough.

German IP disappoints in August

“I know what you did last summer…”. German industrial production disappointed in August, dropping by 1.2% MoM, from +1.2% MoM in July. On the year, industrial production is still up by 2.3%. The drop was widely spread across all sectors. Only the production of intermediate goods remained flat. The sharpest declines were recorded in the production of capital goods and energy. The German industry is still struggling to gain momentum. Yesterday’s drop in new orders already signaled a note of caution. The August drop marked the first decline for two consecutive months since the beginning of the year. A clear sign for caution. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy. All in all, today’s weak industrial production data will again give rise to speculation that the German economy is suffering from the Chinese slowdown. In our view, however, there is no need to panic. Just remember last summer when the German industry went through a similar period of weak data. In the end, the batch of disappointing data was rather the result of too many Germans enjoying too much vacation than the beginning of a downward trend. Let’s hope that history repeats itself.

German labour market remains strong

Good news with a bit of blush. German unemployment dropped by a non-seasonally adjusted 87,600 in September, bringing the total number of unemployed down to 2.708 million. In seasonally-adjusted terms, unemployment increased by 2,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.4%. The late-summer revival of the German labour market turned out to be softer than normal. In fact, today’s September numbers are the worst September performance of the German labour market since 2002. However, in our view, this is probably the effect of the summer vacation ending in September in more regional states than normally and not a sign of a structural weakening of the labour market. Interestingly, latest numbers show that the success story of the German labour market does not only hold for a couple of lucky ones but is actually spreading across the entire market. Last year, the number of people working in so-called “normal” employment conditions, ie mainly full-time working hours, increased by more than 450 000 jobs. In the same period, the number of low-wage jobs came down. A clear indication that despite constant headline numbers, the German labour market is still evolving positively. Looking ahead, and despite the uncertainty stemming from the Volkswagen crisis, the prospects for the German labour market remain bright. The number of vacancies is still increasing and employers, particularly in the service sector, have again stepped up their recruitment plans. According to a recent study, the often-discussed lack of qualified workers mainly occurs in the engineering, the metal and electronic industry. Obviously, these numbers will add comfort to the currently widely heard equation that an economy with a strong labour market, combined with high vacancies, the lack of qualified workers and the demographic change, can digest a high inflow of migrants. However, whether this equation is simple or only simplistic remains to be seen. Language skills, recognition of diploma, financial support and integration in society are just some issues that will determine whether Germany can really make it. In our view, one thing is for sure, a successful integration of the current migration inflows requires an unprecedented and long-lasting flexibility of the German economy and society. All in all, the German labour market will remain an important growth driver this year and beyond. The challenges ahead, however, are much bigger than the relatively dull and constant data from today’s report suggest.

Germany - Chased by cars?

Tomorrow’s Ifo index should get less attention than normal. The latest events in the automotive industry overshadow ordinary confidence indicators and could eventually leave their marks on the German economy. Normally, the release of the Ifo index is always a special day for markets and observers of both the German and the Eurozone economy. It remains the first and most prominent leading indicator. Tomorrow’s release, no matter what the outcome will be, is already outdated before the numbers have actually been released. As so often in recent months with German confidence indicators, the Ifo comes between at least two drastic events and therefore is unable to capture the impact of any of the events. In normal circumstances, tomorrow’s Ifo index should give a better understanding of the possible impact of the late-summer market turmoil and the Chinese slowing on the German economy. The ongoing refugee crisis and now Volkswagen shocker, however, pose new risks to the German economy, which tomorrow’s Ifo will not yet capture. As regards to the refugee crisis, it is clearly too early to assess the possible impact. Besides the evident direct costs of building refugee shelters and housing and offering financial support, all other effects on, for example, the labour market, are still too unclear to be put in numbers. Obviously, the simple equation that an ageing economy with a shrinking labour force needs more immigration is appealing. However, only time will tell as to whether the German society can show enough and, even more important, sustainable flexibility to support long-term integration. As regards to Volkswagen, a short-term reaction of the German economy is more likely, even if at the current juncture it still is unclear what the impact from recent allegations will really be. Needless to say, owning 12 brands in seven European countries and having a global market share of around 13% of all passenger cars, there will be an impact. Volkswagen is one of Germany’s most important global champions. It is an important growth driver for the German economy. In Germany, Volkswagen employs more than 270,000 people and according to media reports is the third largest employer in the EU. Returning to Germany and adding a proxy of the possible suppliers to the equation, Volkswagen accounts for roughly 1.5% of German employment and even more when it comes to the growth impact. At this point, it is unclear what the impact of the probe into VW’s diesel manipulations will be. Volkswagen set aside more than €6bn as risk provisions. Estimates of a possible fine from US regulators for Volkswagen currently range from €1bn to €16bn. Moreover, the company will clearly have costs in changing the cars, with latest reports referring to 11 million cars affected by the diesel manipulations. As a reminder, Volkswagen produces around 10 million new cars each year. The reputational damage is currently impossible to assess. While the German economy defied Greece, the euro crisis and the Chinese slowdown, it could now be facing the biggest downside risk in a long while. The irony of all of this is that the threat could now come from the inside, rather than from the outside.

Column: Over Merkel, emoties en Waterloo

Angela Merkel is alom bekend als politieke overlevingskunstenaar. Haar doormodderen en strategisch overnemen van standpunten van de tegenstander is haar op verwijten van visieloosheid en draaikonten komen te staan. Niet de wens het klimaat te redden, maar wel de (bijna) kernsmelting in Fukushima en het aangewakkerde anti-nucleaire sentiment deden de bondskanselier plots van standpunt veranderen. Met deze geniale draai veegde zij in een keer het partijprogramma van de Groenen van tafel en maakte zij van Duitsland een voortrekkersland in energie. Duitsland sinds jaar en dag vrijwel het laatste land zonder wettelijk minimumloon? Merkel maakt er haar speerpunt van en haalt de socialisten links in. Over Merkels draaikonterij in de eurocrisis, van géén hulp tot een derde pakket voor Griekenland, is inmiddels ook al alles gezegd. Merkel is de Houdini van de Europese regeringsleiders, een boeienkoningin, die zich uit elke val weet te bevrijden. Zij is een meester in het aanvoelen van de publieke opinie, terwijl zij zelf nooit op emotie is betrapt. De vluchtelingencrisis heeft dit veranderd. De Duitsers laten nu een groot hart zien. Vluchtelingen worden ruimschoots opgenomen, juichend met dekens en knuffels ontvangen op treinstations en de bereidheid hen te helpen is groot. Tienduizenden vluchtelingen lopen op de snelweg in Hongarije, ‘Germany, Germany’ en ‘Merkel’ roepend. Kan Duitsland die toeloop aan? ‘Wir schaffen das’ (dat krijgen we voor elkaar), beweerde de bondskanselier stellig. Dat was een week geleden. Nu zijn de grenzen dicht, zijn de opvangkampen, sporthallen, stations en lege scholen overvol en luidt elke deelstaat de noodklok. En de opvangbereidheid in de andere EU-lidstaten laat te wensen over. De vluchteling-stroom en de hoop op een betere toekomst in ‘Germany’ zijn alleen maar groter geworden. Heeft de best geïnformeerde vrouw van het westelijk halfrond werkelijk niet voorzien dat de genereuze opname van de vluchtelingenstroom de poorten alleen maar verder zou openzetten en dat de voorzieningen in een week uitgeput zouden zijn? Dat er zicht is op een bevolkingsaanwas van 12,5 procent in één jaar? Licht hierop werpt nu - na sluiting van de grenzen en de vraag of Duitsland zich niet moet verontschuldigen vanwege de gastvrije ontvangst van de vluchtelingen - haar uitspraak ‘Dann ist das nicht mein Land’. Merkel toont emoties. De ironie van de geschiedenis is dat net nu Merkel eindelijk emoties laat zien, dit haar einde kan inluiden. Want Duitsers zijn vriendelijk en zullen helpen bij humanitaire nood, maar ook Duitsers willen niet naast een vluchtelingenopvanghuis wonen en sturen hun kinderen naar een witte school. De grenzen kraken en de publieke opinie en de eenheid binnen de christendemocraten vertonen al de eerste barsten. Elke leider vindt vroeg of laat zijn Waterloo. En wat is er mooier voor een christendemocrate dan ten onder te gaan aan barmhartigheid? Deae column verscheen vandaag in het Belgische dagblad "De Tijd"

German exports surge in July

The reliable friend. July trade data just showed that the export sector remains an important growth driver of the German economy and has added to evidence of a solid start to the third quarter. Exports increased by 2.4% MoM, from -1.1% in June. As imports increased by 2.2% MoM, the seasonally-adjusted trade balance improved to 22.8 bn euro, from 22.1 in June. While many German commentators still complain about the ECB’s QE programme, German exporters should send a thank-you letter to Mario Draghi. Notwithstanding the excellent quality and product specialization of German exporters, the weak euro has clearly been a very special stimulus package; actually for the entire German economy. While industrial production is still struggling to gain momentum, exports have increased by more than 17% since the start of the year. In the same period, the effective nominal exchange rate of the euro has depreciated by around 4%. A closer look at German exports shows that exports to some countries are more sensitive to exchange rate movements than others. Interestingly, German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, German exports to the US seem to be most sensitive exchange rate changes. An important driver behind the fact that in the first half of the year, the US has become the single most important German trading partner; taking over this number one position from France. As regards the other currently often discussed German trading partners, a comparison of export and exchange rate developments shows that exports to both China and other emerging markets are less correlated. Looking ahead, this link between exports to different destinations and exchange rate movements is both good and bad news for the German economy. It shows that a weak exchange rate might compensate for domestically-driven problems in emerging economies, while at the same time it should further boost exports to the US. All in all, the weaker euro seems to have off-set domestically-driven weaker demand in several emerging economies. If and when the Fed finally starts hiking interest rates and the anticipated further weakening of the euro actually materializes, German exporters should not only send a thank-you letter to Mario Draghi but also to Janet Yellen.

Draghi gives dovish present on his birthday

What a difference only a couple of months can make. Remember that back in March and April, the ECB was very upbeat on the Eurozone economy, with ECB president Draghi obviously enjoying the positive impact from QE (and even its pure announcement effect)? Now, just a couple of months later, the ECB has become less upbeat. After today’s ECB meeting, president Draghi sounded rather dovish, keeping the door for stepping up QE open. The somewhat more downbeat economic assessment is mainly the result of weaker growth in emerging markets. The ECB still expects a gradual recovery, albeit at a somewhat weaker pace. This was also reflected in the latest ECB staff projection, which foresee GDP growth to come in at 1.4% this year (from 1.5% in the June projections), 1.7% in 2016 (from 1.9%) and 1.8% in 2017 (from 2.0%). As regards inflation, ECB staff projections were revised downwards significantly on the back of lower energy prices. In the latest projections, ECB staff expects inflation to come in at 0.1% this year (from 0.3%), 1.1% in 2016 (from 1.5%) and 1.7% (from 1.8%). All these projections, however, have to be taken with a large pinch of salt as the cut-off date was much earlier than usual and therefore before the peak of latest market turmoil. Normally, the cut-off date of ECB staff projections is around the 20th of the month, now it was the 12th. The early cut-off date is an additional explanation for the ECB’s caution and new emphasis on downside risks. As regards the ongoing QE programme, the ECB announced that it would increase the so-called “share issue limit” from initially 25% to 33%. This decision was taken after a first assessment of the first six months of QE and means that the ECB could now purchase up 33% of each government bond issuance (as long as this would not give the ECB a blocking minority). While some market participants saw this measure as a first step towards stepping up QE, it is in our view a more technical measure, reflecting the fact and fear that the ECB could run into troubles achieving its monthly target of 60bn euro. Needless to say that the drop in inflation projections has revived the deflation versus disinflation debate within the ECB. It is the same debate the ECB had at the end of last year when discussing the need for QE. It is the debate on whether low or negative headline inflation rates, mainly triggered by dropping energy prices, do lead to deflationary expectations or are simply a blessing for the economy, increasing consumers’ purchasing power. In today’s comments, Draghi suggested that currently the ECB was still tending to the “it’s a blessing” explanation. Still, Draghi made two important comments which in our view set the door for more QE a bit more open: the small addition of “or beyond” to the targeted duration of September 2016 for the QE programme and the phrase that the Governing Council emphasized its “willingness and ability to act, if warranted, by using all the instruments available within its mandate and, in particular, recalls that the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme.” The door to more QE is open, even if Draghi also stressed that the ECB today had not discussed this possibility, but will the ECB also walk through this door? To answer this question, one has to go back to the initial QE discussion in late 2014. In our view, back then the deflation threat was a welcome stalking-horse to convince even die-hard monetarists in the Governing Council to sign off QE. Of course, successful QE would eventually also increase inflation and inflationary expectations but only indirectly and as a second round effect. The main and most imminent impact from a successful QE would go through a weaker exchange rate and stronger economic growth. Keeping this in mind, lower inflation projections will not per se lead to an increase of QE. To really see the ECB stepping up QE, the Eurozone recovery would need to falter first. On his birthday, Mario Draghi did not receive but actually gave a present to financial markets, stressing the ECB’s determination to do everything to support the Eurozone economy.