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.

German inflation in August signals new headache for ECB

Based on the results of six regional states, German headline inflation remained unchanged at 0.2% YoY in August. On the month, German price development was flat. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation remained unchanged and stands now at 0.1% YoY. A quick look at the available components at the regional levels shows that low headline inflation is not only the result of lower energy prices but also some tentative second-round effects on consumer goods. At the same time, higher prices in the service sector indicate that there is clearly no risk of deflation for the German economy. Interestingly, the weakening of the euro exchange rate is still not visible in significantly higher import prices. To the contrary, import prices continue to fall, with latest data showing a 0.7% YoY drop in August. Looking ahead, the latest plunge in commodity prices should leave its marks on headline inflation in the coming months. Even a drop into negative territory cannot be excluded. Against this background, reaching the official Bundesbank projection of 0.5% annual inflation for the entire year 2015 has become highly unlikely. It would actually require headline inflation to average 0.9% in the remaining months of the year. In our view, headline inflation should stay close to but above zero for the post-summer months before gradually increasing towards 1% YoY. Consequently, these low inflation rates should continue supporting private consumption. While low inflation or even negative inflation rates are a blessing for German consumers, they could become a new headache for the ECB. As at the end of last year when the discussion about a possible QE started, the ECB is again confronted with deflationary forces. Or to be more precise, with disinflationary forces. With commodity prices now significantly lower than back at the end of 2014, the ECB will have to decide whether low or negative inflation rates are rather positive (ie strengthening purchasing power and domestic demand) or negative (ie contributing to dropping inflation expectations). This discussion should be sharpened by the latest round of ECB staff projections, which in our view should show a significant downward revision of the ECB’s inflation forecasts. The last edition of the ECB projections back in June included the technical assumption of an average oil price of 64 USD/b this year, 71 USD/b next year and 73.1 USD/b in 2017 (based on future contracts). Even if the cut-off date of the latest projection round was probably slightly before the peak of recent market turmoil, these oil price assumptions do now look very outdated. Just doing some quick back-of-the-envelope calculations suggests that the new commodity environment could lead to downward revision of the ECB’s inflation projections of between 0.4 and 0.6 percentage points for 2016 and 2017. In June, the ECB projected inflation at 1.5% in 2016 and 1.8% in 2017. Admittedly, the ECB projections are much more complex and sophisticated than our back-of-the-envelope calculations. However, anything else than a clear downward revision of the ECB’s inflation numbers next week would be a surprise. All in all, the latest plunge in commodity prices will clearly revive the good vs bad deflation debate in the EuroTower. For the time being, this should not yet lead to new policy action. However, recent comments by ECB chief economist Peter Praet confirm our view that latest market developments have rather increased than decreased chances for more QE.

German Ifo defies market and China woes

Just a transitional snapshot or a sign of absolute matter-of-factness? German companies remain unimpressed by the current series of uncertainties and turmoil. Neither the Greek crisis nor the new Chinese uncertainties and stock market turbulences have been able to dent German business’ optimism. Germany’s most prominent leading indicator, the just released Ifo index, increased to 108.3 in August, from 108.0 in July. While the current assessment component increased to its highest level since April 2014, the expectation component dropped marginally to 102.2, from 102.3 in July. There are two possible explanations for today’s surprise increase. Either the ongoing stock market turbulences came simply too late to have an impact on the Ifo survey and will therefore only unfold their full negative impact next month, or German businesses are a bunch of ice-cold realists, sticking to the pure facts. In our view, there are many arguments in favour of the latter. And, indeed, the pure facts clearly argue against panic. First of all, as illustrated by this morning’s second estimate of 2Q GDP data, the German economic model has become much more balanced than critics have been complaining about. GDP growth was confirmed at 0.4% QoQ, mainly driven by both net exports and consumption. At the same time, inventories and investment turned out to be a drag on growth. The bigger picture shows that over the last quarters, private consumption has been a stronger growth driver than net exports. While net exports contributed less than 0.2 percentage points to quarterly GDP growth rates, private consumption accounted for 0.3 percentage points. The renewed drop in energy prices should clearly support domestic demand in the months ahead. Secondly, a slowdown of the Chinese economy is not the same as a recession. After years of strong growth, it is somewhat normal that growth rates are coming down. Let’s not forget that at the current growth rate, the Chinese economy would still add the size of the Swiss economy every year. Thirdly, German exports to China have already slowed down in the first half of the year, without derailing the German recovery. The geographical diversification of German exporters should cushion any further weakening of Chinese demand. China currently accounts for less than 6% of total German exports. As long as other major export markets like the US, the UK, Eastern Europe and the Eurozone are continuing to grow or at least avoid a new slowdown, German exports should remain solid. Fourthly, the devaluation of the Chinese renminbi alone should not automatically crowd out German products. To the contrary, over the last five years, German exports to China had recorded growth rates of between 20% and 60%, with an exchange rate much stronger than currently. Last but not least, latest stock market turbulences, Chinese uncertainties and a marginally strengthening of the euro exchange rate have gone hand in hand with a sharp drop in commodity prices. This drop in commodity and energy prices is in our view the final argument against any panic as it should support domestic demand. All in all, it is obviously too early to give the final verdict on the economic fallout of the latest market turmoil and Chinese uncertainties. German businesses, however, are taking a rather benign stance, putting their money on the fundamental strengths of the German economy.

Eurozone: Behind the scenes of Germany's "yes"

Today’s vote in the German parliament will no doubt bring a “yes” for the third Greek bailout package. While the outcome of the vote might not be spectacular, the details are clearly explosive. Greece and the ongoing negotiations have been the dominant topics for German politicians and common people over the entire summer. With today’s vote in the Bundestag, the German parliament could end these discussions; at least for the time being. To be precise: 631 German MPs have returned from their summer vacation to vote on the third bailout package for Greece. Chancellor Merkel’s government holds 504 seats and, moreover, at least one opposition party – the Greens (holding 63 seats) – already announced it would also vote in favour of a third Greek package. Consequently, anything else than an overwhelming “yes” vote would be a surprise. Nevertheless, today’s vote will be a test for Angela Merkel’s leadership. While opposition from other German parties against the new Greek bailout package has been rather muted, it is Merkel’s own party – the conservative CDU – which is still struggling with support for Greece. When the German parliament voted on the start of the official negotiations with the Tsipras government, 60 members of Merkel’s party voted against. In recent days, the “no” voters have received increasing media attention in Germany. According to reports, Merkel’s chief whip, Volker Kauder, had threatened possible dissidents that they would face consequences, like losing posts and positions in the party, in case they do not stick to the official party line. Against this background, all eyes will be on the exact number of “no” votes from Merkel’s own party today. A number higher than the earlier 60 would not immediately be a problem for Merkel. There simply is no crown prince or princess in her own party, neither are there any signs of a palace revolution. However, in the longer run, a growing number of dissident votes would clearly weaken Merkel’s position in the government and might eventually even reduce her appetite to run for a fourth term in office in the 2017 elections. On a more substantial point, the German government will continue having a hard time, even after today’s vote. It’s the role of the IMF in the third Greek bailout package. German politicians have frequently said that there would be no new package for Greece without IMF participation. At the same time, however, IMF participation would mean debt relief or even debt forgiveness for Greece. At least the latter is something, the same German politicians have been strongly opposing for a long while. How the German government wants to square this circle is still unclear. In our view and judging from last Friday’s Eurogroup statement, a face-saving compromise could be that initially IMF participation would be limited to technical assistance, monitoring and surveillance of the Greek reforms. Later, probably in October after a first successful assessment of the Greek measures and their implementation, the Eurogroup could decide on debt relief measures and then bring the IMF on board with additional financial assistance. Such a scenario seems to be backed by Friday’s Eurogroup statement which said that “in line with the Euro summit statement of 12 July, the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and repayment periods) aiming at ensuring that Greece's gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures agreed in the ESM programme and will be considered after the first positive completion of a programme review.” All in all, today’s vote might not be as interesting as another episode of “House of Cards” but it has at least the potential to provide some explosives, even Francis Underwood would pay attention to.

German growth - strong without being impressive

Neither Greece nor China were able to stop the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.4% QoQ in the second quarter, from 0.3% QoQ in 1Q. Compared with the second quarter of 2014, German GDP increased by 1.6%. 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 driven by exports and domestic consumption. Investment was a drag on growth. The Eurozone powerhouse has successfully defied external turbulences. Despite the Greek crisis, the Chinese stock market collapse and growth slowdown fears as well as continued weakness in many Eurozone countries, the German economy continued its latest stretch of four consecutive quarters with growth averaging 0.4%. Since the last technical recession in 2012, the economy has grown by an average of 0.3% each quarter. And there is more. Exports have returned as an important growth driver, showing that Germany indeed is one of the main beneficiaries of the weaker euro. Nevertheless, not all that glitters is gold. The fact that record low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth. Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case. Looking ahead, mixed monthly data have made it difficult to get a good grip on Germany’s growth outlook. While industrial production disappointed in June, new orders were encouraging and soft indicators – despite some recent weakening – remained strong. Record high employment, low inflation and decent wage growth remain strong trumps for the domestic economy and bode well for the second half of the year. However, at the same time, it is not difficult to envision a cyclical cooling of Germany’s export-driven engine. The key buyer of German capital goods, China, is in the midst of a slowdown, while Germany’s service sector and domestic consumption – despite recent positive developments – are currently still not able to fully offset a possible strong hit to exports. After the rebalancing discussion as part of the euro crisis debate, China’s slowdown will now provide new arguments in favour of more domestic investment in Germany. Finally, although highly positive in the context of the euro crisis, the latest improvement in Eurozone periphery countries will not be able to compensate for the continued stagnation of the French economy and its direct impact for German exports. All in all, the first estimate of German Q2 growth just confirmed that the Eurozone’s economic powerhouse is cruising along nicely, despite several external turbulences. While the Eurozone economy seems to see some signs of rebalancing with the stagnation in France and strong growth numbers from Spain and Greece, Germany remains an almost boring beacon of reliability. Carsten Brzeski