One chart - one message: Draghi's positive contagion has still not reached the real economy

Latest ECB data on MFI interest rates shows that fragmentation remains high.

German new orders point to continuing decoupling from rest of Eurozone

Some rays of sunshine. German new orders increased by 2.3% MoM in February, more than offsetting January’s drop of 1.6%. On the year, new orders have finally left the territory of negative growth rates for the first time since December 2011. The February increase was widely-spread across all sectors. Orders of capital goods increased by 3.5% MoM. Interestingly, the strongest increase came from domestic (+2.2% MoM) and non-Eurozone (+2.7% MoM). Orders from other Eurozone countries increased at a slower pace and are still down by almost 2% on the year.


German new orders have been on a zig-zag trend for almost one year. The last time new orders increased for two consecutive months was in February and March last year. Therefore, today’s increase is good news, as it shows that the industrial backbone is not running out of steam, but it is no reason to become overly cheerful.

Looking ahead, with the solid labour market and surprisingly strong retail sales, domestic demand should be an important growth driver this year. In addition, the pick-up in non-Eurozone demand shows that the German economy benefits from the gradual recovery of the global economy. In this context, today’s new order data add to the evidence that the German economy’s decoupling from the rest of the Eurozone is continuing.

Clueless in Frankfurt

At today’s meeting, the ECB kept interest rates on hold. During the press conference, ECB president sent dovish signals without substantiating possible next steps.


Despite a weak batch of confidence indicators in March, the ECB’s tone on the economic outlook remained rather unchanged. The ECB still expects the improvements in financial markets since last summer to “work their way through to the real economy” and still foresees a gradual recovery in the second half of the year. Risks to the economic outlook remain to the downside. As regards inflation, the ECB still sees risks being broadly balanced. As in March, the euro exchange rate is not any longer considered to be a risk to price stability.

Although the ECB seems to stick to its earlier macro-economic assessment and has, at least for the time being, filed the latest disappointing sentiment indicators under “one-off fluctuation”, ECB president Draghi sounded slightly more dovish than in March. The promise that the ECB’s monetary policy stance will remain accommodative “for as long as needed” and that liquidity operations will be continued with full allotment “for as long as necessary” was already given last month but received a more prominent position in today’s introductory statement. Combined with the only real new phrase of “in the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability”, this normally could that a rate cut has come closer. However, during the Q&A session, Draghi explicitly said that the current Governing Council’s consensus was not to look at rates for the time being.

Ahead of today’s meeting, there had been a lot of speculation about possible ECB action to ease financing access for SMEs. Despite some defragmentation in financial markets, Draghi’s earlier whatever-it-takes has not (yet) reached the real economy. One of the reasons for this failure is that defragmentation in sovereign bond markets did not translate into defragmentation of bank lending rates. Re-establishing the monetary transmission mechanism so that credit will flow to the real economy seems to be the ECB’s number one priority. However, judging from today’s press conference, the ECB looks rather clueless on how to tackle the problem.

Draghi acknowledged the problem, saying that the ECB was still looking into the issue. Draghi said that the ECB had discussed several possible measures. However, the studying of other countries’ experiences and measures will continue. What the exact measures could be remains unclear. Draghi just mentioned difficulties and the fact that boosting SME financing was not only an ECB task but could require the involvement of more actors like governments, the EIBs and alikes, and national central banks. Whether this hints at collateral easing or fully-fledged asset purchases remains unclear. In our view, the crucial question of any future SME lending programme will be “who will take the risk”.

Once again, despite new dangers of refragmentation and signs of economic weakening, the ECB has decided to stay inactive. It is obviously not the result of a misjudgment of the current situation but rather the awareness that rate cuts would hardly be effective and that any SME lending bazooka is technically and politically very hard to construct. The fact that Draghi stressed the OMT – up to now a pure psychological measure – as the ECB’s most powerful monetary policy tool illustrates the ECB’s frustration to find further measures. It looks as if the ECB has also realized that there is no bazooka to tackle the economic fragmentation.

If the recovery fails to materialize, the ECB will have to choose one of the two options. But for the time being, the ECB just looks a bit clueless (and so are we).

ECB preview

The latest drop in confidence indicators, the aftermath of the Cyprus crisis and lower inflationary risks could provide the ECB with an excellent justification to cut rates this week. However, in our view, the ECB will again resist the temptation and keep rates on hold on Thursday. The ECB’s main concern is not the absolute level of its policy rate but the continued fragmentation of bank lending rates, particularly for SMEs. However, up to now, the ECB has not been able to come up with a technically – and politically – acceptable bazooka to boost lending to SMEs. In fact, when assessing possible policy options to stimulate the economy, the ECB faces a new dilemma: choosing a rather ineffective but politically acceptable rate cut or an effective but politically controversial lending bazooka.

Read here ING's ECB preview:
http://pull.xmr3.com/cgi-bin/pull/DocPull/315-172966-5D23/38157617/2013030210005251_E.pdf

Another Sunday night save

Early this morning, Eurozone finance ministers agreed on a revised bailout plan for Cyprus. The Eurogroup re-offered a €10bn package. Small savers will be saved and the burden of the bailout out will now be carried by a smaller number of bigger depositors and shareholders and senior bondholders of the two largest Cypriot banks.

After another extremely long meeting, preceded by other high-level meetings and endless rumors, Eurozone finance ministers agreed on the fifth bailout since the start of the crisis. After Greece, Ireland, Portugal and Spain, Cyprus will be the next official member of the bailout group. 

One week after the first bailout attempt, Eurozone finance ministers and Cyprus agreed on a new bailout. The size of the bailout remains at €10bn euro. The earlier Cypriot contribution of €5.8bn euro was replaced by a complex upfront restructuring of the Cypriot financial sector. The second attempt leaves deposits of less than €100 000 euro unharmed. Instead, the burden of the bailout will now be carried by a smaller number of bigger depositors and senior bondholders of the two biggest banks of the country. In detail, the Eurogroup and Cyprus agreed on the following:

·       The second-biggest bank of Cyprus, Laiki Bank, will be unwound, with full contribution of equity shareholders and bond holders. Viable assets and insured deposits will be put into a “good bank”; €4.2 billion worth of uninsured deposits would be placed into a “bad bank”, with no certainty that big depositors will get any money back.

·       The remainders of Laiki Bank, the good bank, will be merged with the largest bank of the country, the Bank of Cyprus (BoC). BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders. How much uninsured depositors will eventually lose due to the restructuring remains unclear. According to wire reports, it could be around 30%.

·       All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

A happy ending after all? At least a final agreement has come closer and a disorderly default of Cyprus has, at least for now, been avoided. According to the Eurogroup statement, the ECB would continue allowing ELA for Bank of Cyprus. However, a couple of short-term hurdles still remain: i) Will the Cypriot parliament agree on the deal? Probably it will as big parts of the bank restructurings had already been brought forward at the end of last week. ii) Will national parliaments of other Eurozone countries agree? Currently, the Eurogroup expects a formal green light for the bailout only in the third week of April. Still a long way to go. iii) As for the first time during the crisis, temporary restrictions on the movement of capital have been imposed, the question is when Cypriot banks be able to re-open and what will happen then. As more often during the crisis, a Sunday night save brings instant relief but is no guarantee for calmer waters.

More broadly speaking, the crisis in Cyprus, while (at least temporarily) neutralized after this weekend’s decisions clearly shows that the Eurozone still has not found a uniform model to guarantee financial stability in the future. The idea of a banking union to break the link between indebted sovereigns and weak banking systems is not accepted by the stronger countries when it involves burden sharing (which it sooner or later inevitably will have to do). At least not if the banking sector is suspected to be a money laundering place and/or the result of too much risk. The message is clear: the German-led bloc in the Eurozone pushes ahead with conditional solidarity and conditional integration but not with financial charity. As such, failing banks remain the problem of their home country, even if that cripples government finances for many years. Secondly, deposit guarantee schemes cannot be taken for granted. German finance minister Schäuble pointed out that these schemes are only reliable if a country’s public finances can afford them, again emphasizing the direct link between the sovereign’s and the banks’ solvency. On top of that, the challenge for the coming weeks will be how to get the genie - that a cash strapped sovereign may consider a levy on all deposits - back into the bottle. The exemption of small savers could help. However, as so often, it is much harder to restore confidence than destroying it. A recent survey in Spain indeed revealed that nearly 90% of Spaniards are worried that they might face a Cyprus like levy on deposits, while 62% claimed deposits were not safe in Spain. Finally, the decision to impose capital controls, even though loopholes in the Treaty would allow it, shows that the single financial market is far from being assured. The fragmentation of financial markets might be reinforced by the decisions of the last few days, further complicating the ECB’s job. More unconventional measures might be required to cure this.

The Cyprus bailout has been an unprecedented power struggle in the euro crisis. While Cyprus tried to call the Eurozone’s bluff, the Eurozone, led by Germany, wanted to make an example that the rescuers do not like to be blackmailed. Particularly the German government played hardball, based on the assumption that the consequences of a Cypriot “no” would be much graver for Cyprus than for the rest of the Eurozone. Germany won the bet as Cyprus eventually bended. However, this strategy is not risk-free and will hardly work with bigger countries with a broader economic business model than Cyprus. 

German Ifo drops in March

The month after. After last month’s “wow” effect, Germany’s most prominent leading indicator, the Ifo index, shows some downward correction of too optimistic business expectations. The Ifo index dropped in March to 106.7, from 107.4 in February. Both, the current assessment and the expectation component decreased. While the current assessment component dropped to 109.9, from 110.2, expectations fell to 103.6, from 104.6. Despite today’s drop, the absolute level of all components still points to growth in the first quarter.


The German economy started the New Year on a positive footing. Hard data for January basically sent two messages: i) the economy is recovering from the fourth quarter contraction; and ii) the often called for rebalancing of the German economy is materialising. The January acceleration of private consumption, construction and exports once again showed that the German growth model is more than a pure export-oriented beggar-thy-neighbor model.

Looking ahead, however, a good start is no guarantee for a happy ending. While the fundamentals of the German economy remain sound and financing conditions are very favourable, several factors are currently putting a speed limit on the economy. In the short run, new uncertainties and tensions from the euro crisis, the never-ending fiscal cliff in the US and, last but not least, the weather could dampen the recovery. Disappointing new orders in January were already a first warning. In the longer run, ageing and the lack of new structural reforms are likely to take a toll on the economy.

Over the last couple of months, businesses and consumers shook off typical German scepticism and turned out to be real optimists. The Ifo actually recorded its biggest four-months jump since early 2010. Maybe it is this rage of enthusiasm which is, at least partly, behind the German government’s tough stance in the Cyprus affair. In our view, today’s Ifo rather marks a small downward correction of last month’s enthusiasm than a new downward trend. Nevertheless, today’s drop also indicates that relying too much on the German economy’s invulnerability could be dangerous.

Topsportmentaliteit

In een ver verleden deed ik nog enthousiast aan topsport. Een van de lessen van topsport is dat alles gericht is op het ultieme doel. De belangrijkste wedstrijd van het jaar of soms zelfs van jaren. Als topsporter leer je dan ook minstens twee dingen: één, heb een goed plan en hou eraan vast en twee, laat je niet afleiden door omstandigheden waar je zelf geen greep op hebt, zoals tegenstanders, scheidsrechters of het weer. In sommige Europese landen lijkt die topsportmentaliteit te ontbreken.

Blijkbaar geïnspireerd door de tiende verjaardag van de Duitse Agenda 2010 (het hervormingsplan van voormalig bondskanselier Schröder) afgelopen week, heeft de kritiek op de onwenselijke Duitse ‘loondumping’ een nieuw leven gekregen. De loonmatiging in Duitsland de afgelopen jaren heeft een belangrijke bijdrage geleverd aan het terugwinnen van internationale concurrentiekracht.

Sinds het begin van de Agenda 2010 zijn de lonen in Duitsland per jaar gemiddeld met 1,7 procent gestegen, reëel slecht met 0,1 procent. De grootste inhaalslag werd tussen 2003 en 2008 gedaan, toen de reële lonen met 0,3 procent per jaar daalden. De loonmatiging werd ook bereikt door een uitbreiding van de lagelonensector. Tussen 2003 en 2009 ontstonden nieuwe banen, bijna uitsluitend daar.

Economische groei door loonmatiging? Dit is een zeer kortzichtige kijk op de Duitse economie van de afgelopen jaren. De Agenda 2010 had als doel de arbeidsmarkt flexibeler te maken en het stelsel van sociale zekerheid op een houdbaar pad te krijgen. De belangrijkste pijlers van de hervormingen waren het verminderen van zowel de hoogte als de looptijd van de uitkeringen voor werklozen, de privatisering van de arbeidsbemiddeling en een verlaging van loonbelastingen.

Maar behalve de Agenda 2010 speelden ook andere factoren een belangrijke rol: geluk (de opkomst van de Chinese economie als belangrijke exportmarkt) en privé-initiatieven (herstructureringen en outsourcing in het bedrijfsleven).

Inmiddels is de Duitse economie niet alleen een groeimotor voor Europa, maar is sinds 2010 het aandeel van lagelonenbanen in de economie bijna constant gebleven. Werkgelegenheid ontstaat weer in de ‘normale’ arbeidsmarkt.

Ook het probleem van (te) lage lonen lijkt vanzelf te verdwijnen. Zonder buitenlandse hulp. De reële lonen stegen het afgelopen jaar met bijna 1 procent en zullen ook dit jaar verder stijgen. Bovendien zijn ondertussen alle politieke partijen voorstander van een vorm van minimumloon.

Als bedrijven zich niet aan Europese arbeidswetten houden, moet dat worden aangekaart. Of het nu in Duitsland is of elders. Duitsland nu van loondumping beschuldigen gaat echter te ver en is een te eenvoudige kijk op de Duitse hervormingen. Na jaren van ‘Reformstau’ en verschillende nominaties als ‘zieke man van Europa’ heeft Duitsland tien jaar geleden de schuld bij zichzelf gezocht. Net als een topsporter met een goed plan en een beetje geluk, is Duitsland uit de crisis gekomen.

Elk succes heeft schaduwkanten, maar een beetje meer topsportmentaliteit zou in sommige landen geen kwaad kunnen.


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