Posts Tagged ‘Angela Merkel’

So, Will We See QE3 In 2011?

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 26.11.10 at 04:04

The turmoil in the market for sovereign bond is now clearly spilling over to the corporate sector, and particularly into the financial industry. The banks perceived by investors as the weakest, are getting their insurance premiums kicked up by a substantial amount of bp’s, that in turn raises the banks funding costs, and not every bank in Europe has a wealthy tipple-A government to back them up. According to the German Die Welt Online is the EU commission ready to double the EUR750 billion bailout fund that was established earlier this year. I think I see the QE3 on the horizon.

“This topic is one to watch over the coming days.”

Gavan Nolan

Given the recent turmoil with Ireland, Portugal and Spain, several EU leaders are now considering a significant increase of the euro zone’s 750 billion euro rescue fund. According to Die Welt Online Thursday, the EU commission have already suggested to double the fund. The German government, the ECB  and the Bundesbank have spent the day trying to put out the fire.

Die Welt also writes that Germany –  the economically strongest member of the European community – is rejecting the plans, at least the time being.

After the Irish bailout, the focus is now mainly on Portugal and Spain.

Both countries are under heavy financial pressure these days as their CDS spreads just keep getting wider. This has led investors to doubt that the 750 euro bailout mechanism – The European Financial Stability Fund – that was rushed through the EU parliament earlier this year will be enough to cover even Spain alone if they should ask for help.

In response to questions in Paris Thursday president Alex Weber of the German Bundesbank said: “If the amount is not enough, we can increase it.” Adding: “An attack on the euro has no chance of success.”

I can’t help wondering who these evil attackers of the euro is? The Chinese?

Mr. Weber’s statement might also be interpreted as another way of saying: “We’ll print as much money as we need.”

Die Welt reports that the rest of the fund – assumingly 440 billion euro – could be claimed in the coming months by other countries in the euro area.

Spanish banks have been among the worst performers in recent weeks amid fears over the sovereign’s strength.

“The Markit iTraxx Europe is now 8.5 wider since this time last week and has returned to the levels seen at the beginning of October. Considerable widening in bank spreads, driven by sovereign credit deterioration and talk of burden sharing, has played a major part in the index losing ground,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

Given the Thanksgiving holiday in the US, it was no surprise to see this trend continue today.

Sovereigns were buffeted by headline risk – no change there.

Brian Lenihan, Ireland’s finance minister, insisted that the crucial December budget would be passed by parliament. But the coalition government’s slender majority is expected to be reduced by one if it loses a by-election today, as predicted by the polls. And Enda Kenny, leader of the opposition party Fine Gael, pledged today that he would not be bound by the recent austerity programme.

“Ireland received another blow when LCH Clearnet announced that it would be increasing its margin requirement on the sovereign’s bonds from 30% to 45%, the third rise such rise in as many weeks,” Nolan notes.

Ireland’s spreads widened beyond 600 bp’s Thursday, before recovering later in the session.

German officials, perhaps mindful of their perceived role in exacerbating the current crisis, had a very busy day, trying hard to support the alleged economic recovery.

Angela Merkel stressed that the existing European Financial Stability Fund would not be changed before it expires in 2013.

“German ambiguity around this issue has contributed to the recent widening,” Gavan Nolan at Markit points out.

“There have been rumours that the EFSF would be increased in size, and this topic is one to watch over the coming days,” he concludes.


  • Markit iTraxx Europe 107.5bp (+0.5), Markit iTraxx Crossover 483bp (+1)
  • Markit iTraxx SovX Western Europe 180bp (0)
  • Markit iTraxx Senior Financials 157bp (0)
  • Sovereigns – Greece 950bp (-22), Spain 301bp (+1), Portugal 480bp (-2), Italy 204bp (+2), Ireland 585bp (+4), Belgium 151bp (+2)



Merkel: An Exceptional Serious Situation

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 24.11.10 at 14:23

German Chancellor Angela Merkel says that the euro is in an exceptionally serious situation, adding that politicians a year ago could not imagine what’s happening now. The German Chancellor’s statement Tuesday afternoon pushed the euro further down vs the dollar , and raised the yield on Spanish and Portuguese bonds. Later in the evening Standard & Poor’s lowered Ireland’s debt rating by two steps, with a negative outlook. The nightmare continues today.

“The financial stability of Europe is at risk.”

Lars Løkke Rasmussen

Late Tuesday evening  Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook. The Irish prime minister Brian Cowen prepares to unveil the four-year deficit-cutting plan, as the European Commission warns the Irish politicians not to topple the government.  Meanwhile, the contagion spreads like fire through the rest of the euro zone.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P’s says in a statement.

Brian Cowen

Adding that putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight.

S&P’s cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, according to the statement.

The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade, Bloomberg reports.

Still, the euro – which dropped 1.9 percent against the dollar yesterday – rose 0.2 percent to $1.3336 as of 11:12 a.m. in London.

The yield on Ireland’s 10-year bond was little changed at 8.61 percent after jumping 34 basis points yesterday.

Exceptional Serious

“I don’t want to paint a dramatic picture, but I just want to say that a year ago we couldn’t imagine the debate we had in the spring and the measures we had to take,” German chancellor Angela Merkel said in a speech in Berlin yesterday.

“We are facing an exceptionally serious situation as far as the euro’s situation is concerned.”

Olli Rehn

The European Commission also on Tuesday issued a veiled warning to the Irish political class not to topple the government.

“Stability is important,” EU economy commissioner Olli Rehn said, speaking to reporters in Berlin.

“We don’t have a position on the domestic democratic politics of Ireland but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU-IMF programme in time. The budget needs to be adopted,” Mr. Rehn said, adding:  “Ireland will pass the budget in the time foreseen and certainly sooner than later.”

Financial Stability At Risk

Lars Løkke Rasmussen

Danish prime minister, Lars Lokke Rasmussen, have announced that his government would participate in the euro zone’s bailout of Ireland alongside fellow non-euro-using-states, like Sweden, the UK as well as Switzerland and Norway.

“The financial stability of Europe is at risk so it is very important to make a broader effort to try to stabilise the situation,” Mr. Rasmussen told the Financial Times.

Norway’s finance minister, Sigbjørn Johnsen, says in a statement that Norway will support Ireland through the International Monetary Fund, and suggest that the country might come up with additional support.

Sigbjørn Johnsen

“Norway will contribute to the financing of the IMF part of the loan package to Ireland through the financing arrangements we already have in place with the IMF, including our bilateral loan agreement with the IMF,” Mr. Johnsen says.

“We have not received any request for additional financial support. If we receive a request from Ireland for a bilateral loan, we will of course consider it.”

Related by The Swapper:

Ireland Starts Informal Talks Over EU/IMF Bailout

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 12.11.10 at 15:11

According to the Irish Times informal contacts are under way between Brussels, Berlin and other capitals to assess their readiness to activate the €750 billion rescue fund in the event of an application from Dublin. However, German chancellor Angela Merkel is refusing to back down from her push to force private investors to share the burden of the European debt crisis, which have sent Irish borrowing costs to record high levels.

“The bond spreads are very serious and there is international concern throughout the euro zone about that.”

Brian Lenihan

The Irish Times has established that informal contacts are under way between Brussels, Berlin and other capitals to assess their readiness to activate the €750 billion rescue fund in the event of an application from Dublin, the newspaper writes Friday. In Brussels, a commission spokesman says the European authorities are following the situation very closely.

Germany, French, UK finance ministers are set to meet Friday to discuss Ireland and the bond market crisis as Irish, Spain, Portuguese and Italian borrowing cost keeps rising towards unprecedented levels.

The Irish CDS spread is now back at record high 600 basis points, the Portuguese at 500 and the Spanish spreads are getting close to 300 bp’s.

Brian Lenihan

The financial markets seem to have lost all confidence in Ireland, and the political anxiety (not to say paranoia) in Europe centres on the fragility of the Government’s position as it prepares to extract €6 billion in cutbacks and tax increases in the budget and a total of €15 billion in the four-year recovery plan.

Further concern surrounds the position of Ireland’s banks, whose shares have fallen steadily in recent days amid fears the €45 billion bailout bill might rise.

Although some diplomats say it is to Ireland’s advantage that the Government is not at present borrowing from the investors, they fear contagion as the premium on Spanish and Italian debt jumped to record levels.

In addition the problems are now spilling over into the broader corporate market, in particular the financial sector.

Minister for Finance Brian Lenihan have attributed to some of the pressure on Ireland by referring to “unintended” remarks from German officials saying that new rescue measures would compel private lenders to shoulder some costs in future bailouts.

“The bond spreads are very serious and there is international concern throughout the euro zone about that,” Mr Lenihan says. The Government wanted clarification of the German plans and will proceed without aid, he added. “We have the capacity to put the State on a sustainable and credible basis.”

The financial market, however, is finding it increasingly difficult to take the Irish finance minister serious, remembering his bold statements from December last year: “The worst is over, we have turned a corner.”

Merkel Won’t Back Down

Speaking in Seoul, where she is attending the G20 summit, German chancellor Angela Merkel acknowledged the fact that firm stand on the European bailout issue have upset the markets.

Angela Merkel

Butt Merkel still insist on that it is unfair for taxpayers to be saddled alone with the cost of sovereign rescues:

“Let me put it simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Dr. Merkel says. Adding;  “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

Although Dr Merkel’s strategy has met resistance in the European Central Bank, France spoke up in her support when its finance minister, Christine Lagarde, spoke in favour of the “principle” of bondholders assuming bailout costs earlier this week.

“All stakeholders must participate in the gains and losses of any particular situation,” Lagarde said.

In spite of discussions between major European governments and Brussels, Berlin dismissed the German warnings yesterday, saying that the EU is “concerned” about Ireland’s financial situation and readying a bailout.

On its website, the business newspaper Handelsblatt quotes an unnamed German government source expressing concern about Irish sovereign bonds, saying governments were examining whether Ireland need help or not.

Barroso Ready To Roll

European Commission chief José Manuel Barroso tried to shore up confidence in Ireland yesterday by saying euro countries stand prepared to provide emergency aid if required, but other EU officials stressed the fact that the Irish  Government has not asked for such assistance, yet.

Jose Manuel Barroso

With the single currency falling to a one-month low against the dollar, euro-zone finance ministers will discuss Ireland’s position at their monthly meeting next Tuesday in Brussels.

As 10-year borrowing costs reached 9.26 per cent yesterday, Ireland is the centre of the renewed market turbulence.

“What is important to know is that we have all the essential instruments in place in the EU and euro zone to act if necessary,” Mr Barroso says.

In Brussels, a commission spokesman confirm that the European authorities are following the situation very closely.

“There is no request for the moment. There is no need to activate any mechanism, Mr Barroso just confirmed that, in case of need, the mechanisms are in place,” the spokesman says.

Related by The Swapper:

From Greece With Anger

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy on 04.11.10 at 02:42

Greek police says all international air mail and parcel services to end from the country will be suspended for two days after at least 11 other letter bombs were detected in Athens, Tuesday. One was addressed to French President Nicolas Sarkozy, two others to the Greek parliament and eight to the embassies of Bulgaria, Russia, Germany, Switzerland, Mexico, Chile, the Netherlands and Belgium. In addition were one bombs destined for the Europol office in the Netherlands, and one for the European Court of Justice in Luxembourg.

“Both packages contained explosive devices.”

Greek Police Officials

In Berlin, the German chancellery was on high alert after police destroyed a bomb addressed to Angela Merkel. The parcel was sent from Greece by air mail and UPS delivery and was similar to the Athens letter bombs, according to the German interior ministry. The package, with the Greek ministry of economy listed as the sender, contained explosives hidden in the covers of a book.

It was detonated by security forces in a building adjacent to the chancellor’s office. Ms Merkel herself was not in Berlin at the time, Reuters reports.

Also Italian Prime Minister Silvio Berlusconi had explosives sent to his address.

A suspicious parcel was detected at the Bologna airport in northern Italy and caught fire when it was searched, AFP reports. Nobody was hurt, but the airport was temporarily closed down and several flights got re-routed to other Italian airports.

Greek Prime Minister George Papandreou condemned the bombing attempts, which are attributed by the police to anarchists. The perpetrators were trying to “disturb the social peace in the country through criminal acts,” he says.

A parcel bomb exploded at the Swiss embassy in Athens after an explosive device was thrown into the courtyard of the building. However,  there has been no reports of injuries or deaths.

It happened in spite of  heightened security in the Greek capital, after a mail bomb exploded at a delivery company on Monday. A suspicious package was also found at the Bulgarian and Chilean embassies.

Russia Today reports:

Two Men Arrested

Two men, aged 25 and 22, has been arrested in connection with the plot.

One of them is a chemistry student who was seized wearing a wig and a bulletproof vest, the Irish Times reports.

He is believed to be linked to the radical group “Conspiracy of Cells of Fire,” which has claimed responsibility for numerous attacks against Greek government buildings and banks.

The group is believed to be linked to the urban guerrillas who have killed police officers, a prominent journalist, and now vows to turn Greece into a “war zone.”

The anarchist movements are fuelled by popular anger over harsh austerity measures passed by the Papandreou government in return for an EU-IMF bailout earlier this year.

A government spokesman called the bombing campaign a deliberate attempt to “terrorise” public opinion ahead of Sunday local elections, according to the

Powerful Explosives

The air mail bombs come only a few days after two powerful explosive devices hidden in ink cartridges were detected on-board passenger planes in packages shipped from Yemen to the US.

One bomb travelled on two passenger planes before being seized in Dubai, while the other passed through Germany and almost slipped through Britain before being discovered on a plane at East Midlands Airport.

On Monday Germany introduced a ban on all passenger and cargo flights from Yemen. The move has been criticised by the Yemeni government as unfairly hitting tourists, business people and anti-terrorism fighters in the country.

In what now seems as a prediction of these events last month, the US government issued a blanket travel alert for its citizens visiting Europe, urging them to be cautious when in tourist hotspots, as fresh terrorist attacks may be under way.

The governments of EU responded differently to the alert. Germany notably being the most sanguine, without raising its threat level or issuing travel alerts to its own citizens.

Anyway – the social unrest in Europe have reached a new and higher level.

Related by The Swapper:

This Time Angela Merkel Got It Right

In Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Views, commentaries and opinions on 03.11.10 at 01:02

Angela Merkel is right,” Financial Times Deutschland commentator Wolfgang Münchau writes. And once again we have to agree with him. The German approach to a sustainable solution to Europe’s debt mess is the only solution. It goes straight to the heart of the too-big-to-fail issue, which have crystalized as the main problem in our financial system. No one has the right to eternal economic life support – not banks nor governments. And there has to be a way out.

“The current Lisbon treaty is simply inadequate to deal with the legal and political complexities of an institutional crisis mechanism.”

Wolfgang Münchau

It is not often that Mr. Münchau agrees with the German chancellor. He usually criticize Angela Merkel for overbearing obsession with fiscal stability, and her refusal to engage in a dialogue on macroeconomic imbalances. “But on the specific question of the need for a change in the European Union treaties to create a permanent crisis resolution mechanism, she is indeed right,” Münchau writes in his FT column, Tuesday.

“The current Lisbon treaty is simply inadequate to deal with the legal and political complexities of an institutional crisis mechanism,” Wolfgang Münchau writes.

And such an institution is needed to replace the European Financial Stability Facility when it expires in 2013.

Here’s what Münchau says:

Of course, as everybody in Brussels is keen to confirm, there is no “appetite” for another treaty change after a tortuous decade to get Lisbon agreed.

Wolfgang Münchau

Germany’s constitutional court has left Ms Merkel little leeway. Without a treaty change, the EFSF must run out.

The euro zone would be back to where it was in May.

The constitutional court is an important factor in the German position. It gave a green light to the EFSF, after the government invoked a “force majeure” defence.

The EFSF was set up to protect the euro zone, the government’s lawyers argued.

The court accepted that argument.

But the German government cannot conceivably extend that reasoning to the establishment of an entirely new EU institution.

In its ruling on the Lisbon treaty, the court gave an exceedingly restrictive view on the legitimacy of further European integration without an explicit democratic mandate.

Furthermore, the court would read the “no bail-out” clause of the Maastricht treaty in a strict literal sense.

It could easily block the new mechanism.

The legal risks of going outside the treaty are therefore immense.

The European Council fortunately accepted the logic of a treaty change last week at the end of another long night of negotiations. Herman Van Rompuy, the president of the European Council, will make a proposal by December.

The question is whether the proposed changes will be effective, and whether he can manage to construct them in such a way that it addresses the German court’s legal concerns.

It is not hard to imagine slip-ups. There are substantial disagreements among member states, which have not yet been resolved. The December deadline seems a touch ambitious.

Formally, Mr Van Rompuy will use a well-crafted wormhole in the Treaty on European Union – Article 48.6 – which essentially allows the European Council to change certain aspects of the treaty by unanimity – and without having to put this to a referendum in Ireland or Denmark.

The catch is that this must not involve any power shift to Brussels.

Mr Van Rompuy has already said there will be no change to the “no bail-out” clause. Instead, what he seems to propose is a set of new rules and procedures for the euro zone countries only.

In terms of substance, the aim must be to overcome the big logical inconsistency of three principles underpinning the euro: “No bail-out, no exit, no default”.

The first two are firmly enshrined in the European law.

Default is legally possible, but politically unacceptable, at least for now.

The EU is simply not in a position to handle the repercussions of a sovereign default.

The incompatibility of those goals lies at the heart of the euro zone’s governance crisis.

At least one of those principles will have to be sacrificed.

The “no exit” clause will survive. This leaves bail-out and default.

But would a regime that combines bail-out and default satisfy the German constitutional court?

While Article 48.6 is part of the treaty the court approved, the court will nevertheless scrutinise whether the new arrangements constitute a power shift, and whether this reduces the Bundestag’s influence.

Herman Van Rompuy

Ingenious as Mr Van Rompuy’s legal trickery appears to be from a procedural perspective, it does not resolve the fundamental conflict with the “no bail-out” clause.

How can you have an unconditional “no bail-out” clause in one part of the treaty, and a bail-out procedure in another?

So if this institution is a bail-out mechanism in whichever form, it may well provoke the German justices to rule it unconstitutional.

My best guess is that Ms Merkel will make sure the new regime is as tough as possible.

It will not be a continuation of the EFSF by different means.

What I suspect will happen is that this mechanism will act as an orderly default procedure. It will be much tougher than the International Monetary Fund in its worst Washington-consensus days. It will be constructed in such a way as to provide the maximum number of reasons not to use it.

Such a regime may be acceptable to the German constitutional court, but I am not sure the wider ramifications are yet fully understood by the politicians who advocate such action, and certainly not by investors.

As this becomes clearer, the chances of an agreement, let alone ratification, may diminish.

By Wolfgang Münchau


Here at The Swapper we belive Mr. Münchau also gets it right.

Witch in turn means that we’re probably in for at least two more years of continued uncertainty in the financial markets, naturally followed by continued high levels of volatility.

Related by The Swapper:

Betting On The FED

In High Frequency Trading, Law & Regulations, Quantitative Finance on 11.10.10 at 21:55

European credit indices comfortably outperformed their equity counterparts, Monday, in a session where volumes were diminished by the Columbus Day holiday in the US. Spreads continued to feel downward pressure amid expectations that the next stage of quantitative easing is close to a formality, according to Markit Financial Information.

“The Greek bailout was unpopular with the prudent German public, and Chancellor Angela Merkel would probably be wary of granting Greece any more leeway.”

Gavan Nolan

“An unsatisfactory outcome from the weekend IMF meeting had little impact on spreads. China categorically rejected criticisms of its exchange rate policy, instead highlighting the loose monetary policy of the US. But the prospect of a currency war and beggar-thy-neighbour policies has less resonance with investors than the FED’s liquidity pump, though this may well change if the rhetoric becomes more aggressive.” vice president Gavan Nolan at Markit Credit Research writes in his daily alert.

A weaker than forecast non-farm payrolls report on Friday – not normally a catalyst for spread tightening – only served to firm up the consensus that the Federal Reserve will further expand its balance sheet before the end of the year.

The IMF was also at the centre of the main notable movement today.

Dominique Strauss-Kahn, the IMF managing director, says that the agency might be willing to extend its bailout loans to Greece beyond 2013.

Germany quickly issued a statement that made it quite clear that they would be unhappy with such an extension.

“The Greek bailout was unpopular with the prudent German public, and Chancellor Angela Merkel would probably be wary of granting Greece any more leeway,” Nolan notes.

Nonetheless, the news caused Greece’s spreads to tighten significantly and the sovereign market performed strongly throughout most of the day.

  • Markit iTraxxEurope 97.75bp (-4), Markit iTraxx Crossover 454bp (-15)
  • Markit iTraxx SovX Western Europe 141.5bp (-4.5)
  • Markit iTraxx Senior Financials 119bp (-4.5)
  • • Sovereigns – Greece 695bp (-25), Spain 208bp (-9), Portugal 383bp (-13), Italy 177bp (-7), Ireland 425bp (-5), Belgium 123bp (-1)
  • BP 141bp (-1)


Name Sector Volume Turnover €
NYSE EURONEXT Financials 134,000 2,767,803
STHREE Industrials 306,519 1,082,256
LONDON MINING PLC Basic Materials 160,995 600,862
MUNTERS Industrials 72,709 594,258
NOVAE GROUP Financials 109,369 434,557
REPOWER SYSTEMS Industrials 3,009 352,655
TOM TAILOR HOLDING Consumer Goods 24,350 339,454
CARL ZEISS MEDITEC Health Care 26,852 327,594
JUMBO Consumer Goods 60,000 318,000
A.G. BARR Consumer Goods 20,377 278,735

Top 10 ETF

Name Volume Turnover €
DJ STOXX 600 OPTIMISED BANKS SOURCE ETF 1,484,920 105,929,455
DB X TRACKERS – DJ EURO STOXX 50 ETF 683,510 19,329,663
DB X-TRACKERS ETF DJES50 1C EUR NPV 500,000 14,965,000

Top 10 Trades

Name Sector Volume Turnover €
BBVA Financials 30,000,000 298,198,786
BANCO SANTANDER Financials 10,000,000 94,300,003
GECINA Financials 1,000,000 86,000,000
BAYER Basic Materials 627,772 33,410,027
UMICORE Basic Materials 1,000,000 33,410,000
BANCO POPULAR ESPANOL Financials 6,500,000 30,225,001
SNAM RETE GAS Oil & Gas 5,461,000 20,383,183
DEUTSCHE TELEKOM Telecoms 2,000,000 19,827,999
DEUTSCHE POST Industrials 1,500,000 19,755,000
NOKIA Technology 2,500,000 19,400,001

Major Movers

Name Sector Volume Volume (T-1) % Change
BBVA Financials 70,895,504 4,217,845 1581%
BANCO POPULAR ESPANOL Financials 13,864,888 1,397,678 892%
INFINEON TECHNOLOGY Technology 8,062,722 1,363,419 491%
TELECOM ITALIA Telecoms 22,312,682 7,974,433 180%
HIKMA PHARMACEUTICALS Health Care 3,769,365 1,350,926 179%
DEUTSCHE TELEKOM Telecoms 9,896,973 4,574,373 116%
DEUTSCHE POST Industrials 5,059,129 2,665,023 90%
BT Telecoms 6,625,224 3,844,888 72%
ITV Consumer Services 14,370,746 9,156,002 57%
SNAM RETE GAS Oil & Gas 31,393,314 21,017,338 49%

Germany's Manic Depression

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 05.08.10 at 18:34

There is a saying about the Germans that they are either “himmelhochjauchzend or zu Tode betrübt” – either totally euphoric or depressed. Right now, the Germans are euphoric – at least about their economy, Financial Times columnist Wolfgang Münchau points out as German business confidence is approaching all-time high, reached in 1990 and 2007.

“We are heading away from himmelhochjauchzend to the other choice.”

Wolfgang Münchau

The Happy Faces of Vice Chancellor Guido Westerwelle and Chancellor Angela Merkel.

The mood swing of German industrialists during the first half of this year is quite astonishing, Münchau notes and ask the obvious question:  “What happened? And how should we read these data?”

Well, here’s his answer, published in today’s Financial Times Deutschland:

For a start, we should recall that the German economy contracted by 5% in 2009. Even 2.5% growth in 2010, and a hypothetically optimistic 2% growth rate in 2011, will only just get Germany back to the end-2007 of growth by end-2011.

What we have been seeing in Q1, Q2, and early Q3 is a fast recovery from a very low position after the 2009 slump.

Things are slowly returning to normal.

No Miracle

So when discussing the German economy, it is important to look at actual levels, not just at relative shifts. If you compare German and US real GDP, say over the last 10 years, the US is faring better both in terms of the total period, but, most importantly, also in terms of catch up to the pre-crisis level of real GDP.

The data, at least up until the first quarter, do not suggest that there is a particular German miracle.

All they show is a somewhat greater degree of volatility. Germany slumped faster than the others, and is recovering a little faster.

That’s it.

German Business Confidence. July 2010.

Not Sustainable

I expect Germany’s relative performance to be better this decade, by a little, not by a lot.

We should be clear about why this is likely to be the case. This has nothing to do with productivity enhancing reforms – or some underlying structural features of the German economy.

The main reason is the country’s success in depressing its real exchange rate.

Germany is now reaping the dual benefits of the depreciation of the real exchange rate inside the euro zone, and the nominal depreciation of the euro from the $1.40 plus level to the $1.20 plus level.

Can this be sustained?

Probably not. If the current developments persist, German companies are bound to hit capacity limits shortly, which will in turn put some pressure on the labor market. I have heard estimates according to which we may not be all that far away from that situation.

I would thus expect the Germans on the ECB’s governing council to press for a monetary exit relatively soon. They need higher interest rates to prevent German wages from rising.

If they succeed, Germany’s imbalanced growth strategy might continue for a little while, but this would clear come at the expense of any adjustment within the euro zone.

It really is a zero-sum game.

3 Arguments Against Recovery

I suspect that Spain and southern European countries may not be able to close the competitiveness gap with Germany quickly, but at the same time it is hard to conjecture that the gap might continue to rise further.

In addition, I see three structural factors that speak against the sustainability of the upswing.

They are the decrepit state of the banking system, the global economy, and the self-imposed balanced budget rule. Overtly, the German banks did alright in the stress tests.

The results are not all that different than for the EU average. What the stress tests do not mention is an over-reliance on hybrid capital – which is at best only partially a risk-absorber in a crisis.

If you removed the hybrid capital, the German Landesbanken would be effectively insolvent.

The second factor is the global economy, on which Germany’s export model depends. Unless the upswing is sustained on a global level, Germany will not be able to maintain the most recent momentum.

And finally, the self-imposed constitutional fiscal rule will not have much impact in the short term, as the 2011 fiscal consolidation is relatively modest. But it is likely to be a constraint further down as we proceed through the economic cycle.

There is some cyclical leeway in the rules, but the average allowed deficit of 0.35% is extremely tight, and its legal force is significantly higher than previous soft-constrained budget rules.

Fiscal policy is likely to be a constraint on growth for some time.

A Ricardian Reality Show

The German official line is that the increase in public savings will be perfectly offset by a decrease in private sector savings.

Wolfgang Münchau


They really do believe in all this Ricardian equivalence stuff, despite the fact that there is no empirical support in its favor.

In summary, Germany may still outperform southern Europe, but then so will almost everybody else.

With fiscal and monetary tightening ahead, less scope from windfall gains in the real exchange rate, and a persistently under-capitalized banking sector, it will be tough to maintain the most recent momentum.

In other words we are heading away from “himmelhochjauchzend” to the other choice.

By Wolfgang Münchau


Financial Times Deutschland

Related by the Econotwist:

Merkelomics, The Euro Zone And The United States

Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result

German Banks With More Than 200 Billion Euro In Faul Credits

Global Economy On Fast Track To Disaster

Warns Against Euro Zone “Elite”

Why Optimists Are Wrong About The Euro Zone

Goodbye Keynes – Hello Ricardo!


Enhanced by Zemanta

Merkelomics, The Euro Zone And The United States

In Health and Environment, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 29.07.10 at 00:06

As the US have got its “Obamanomics,” the euro zone now have its “Merkelomics.” This observation was first made by professor of economics, George Irvin, who is a sharp critic of Germany‘s policy and especially the politics of the German chancellor, Angela Merkel. In George Irvin’s view, the euro zone led by Germany is trying to fix the problems of the economy by implementing American style solutions.

“At least the USA had Alexander Hamilton and James Madison to shape its structure—today, Europe has Angela Merkel and Nicolas Sarkozy. I’m not optimistic.”

George Irvin

I’ve had a number of comments on my blog about my piece on Merkelomics, Irvin writes. I shall ignore the one which says “all debt is bad” – has the person in question has ever had a mortgage?

Let me take the more serious point made by one commentator who clearly wants the  euro zone to succeed—a sentiment I share fully.

The commentator says: “I believe the fault in your analysis is that you don’t see the euro zone as a national economy in the making. If you were, you would’ve realized that it doesn’t matter whether euro zone exports originate in Germany or some other euro zone country.”

My reply? I do indeed wish that the euro zone were a national economy in the making and that I could praise the Germans for their export-led growth model. That German industry is admirably efficient I have no doubt (far more so than the UK).

But perhaps I can best explain the case for euro zone reform in the following manner. Below is a short “thought experiment.”

Let us assume—you can tell I’m an economist—that the contemporary USA were like the euro zone, that there was little labor mobility, no Federal Treasury, that Congress was weak and that power lay almost entirely with the individual states (as indeed it did in the late 18th century).

Let us further assume that because there was no Treasury but only a Central Bank, there was no federal borrowing and that individual states had to finance themselves through taxation and state bond issues.

In such a world, the “rating agencies” would look at the trade statistics of the various US states.

Suppose that most US state-level trade was with other states (which it is) and that Michigan and Ohio (which produced mainly manufactures) had enormous trade surpluses while the relatively poor states of Louisiana and Mississippi (which produced mainly fish) ran persistent trade deficits.

(Remember, this story is allegorical.)

Ohio and Louisiana might initially both have AAA+ ratings, but because Louisiana was dirt poor and suddenly was struck by a hurricane causing coastal devastation, its economy became a basket case and its tax receipts collapsed.

George Irvin

In consequence, the rating agencies downgraded Louisiana’s dollar bonds, making it nearly impossible for the state to borrow. Nor could Louisiana export its way out of trouble because, as part of the dollar zone, it could not devalue.

Drastic cuts (internal depreciation) would make it even poorer and more likely to default.

So Louisiana—-together with Alabama and Mississippi— needed help from richer states like Ohio and Michigan. But Ohio, Michigan and various other ‘northern states’ were not without internal problems, and their citizens were reluctant to help the “lazy and feckless southerners.”

Nor would they let the Central Bank buy the bonds issued by these poorer states … until a major crisis occurred.

I leave the reader to finish the story. Needless to say, the crucial point is that the USA is not in the above situation because it has the economic institutions necessary for operating a federal economy.

At least the USA had Alexander Hamilton and James Madison to shape its structure—today, Europe has Angela Merkel and Nicolas Sarkozy.

I’m not optimistic.

By George Irvin

(Read also: The Logic of Merkelomics)

George Irvin is a retired professor of economics and for many years was at ISS in The Hague. He is now (honorary) Professorial Research Fellow in Development Studies at the University of London, SOAS.

Original post at the


Enhanced by Zemanta