24/6/20: German Business Sentiment for June: Mixed Signs of the Ongoing Recovery

Germany's ifo Institute published June survey results for business confidence, reflecting the latest changes arising from the graduate, but fast, 'normalization' of economic activities. There are some improvements in forward expectations, set against virtually no improvement in current conditions:

The gap between pre-COVID19 and current conditions sentiment remains massive, with trough to current reading improvement of just 2.4 points, compared to the pre-crisis to trough fall of 20.2 points. Expectations (6 months forward) gains 11.9 points on the trough, with pre-crisis to trough decline of 21.5 points. This implies that forward expectations are now just over half-way into recovering pre-COVID19 levels, but current conditions assessment still shows dire state of the economy.

So far, current conditions dynamics do not suggest a V-shaped recovery, but there is some hope in terms of expectations. Manufacturing and construction sectors dominate negative outlook. Services sectors current assessment is matched by forward expectations, while trade sectors are showing more robust recovery across the board.

27/5/20: Germany: Employment and Business Activity Show Gentle Uptick in May

Germany employment conditions improved slightly in May, based on ifo Institute survey:

The gains are in line with the Business Activity survey results:

However, both business expectations (major driver of improvement) and current conditions (remaining deeply under water and actually still deteriorating in May) are well below 2009 crisis reading:

8/4/20: Ifo Institute Germany Forecast for 2020

A surprisingly 'positive' forecast for Germany from ifo Institute this morning:

While GDP contraction for 2020 looks sharp at -4.2 percent y/y, unemployment figures appear rather robust and employment levels seem to be only weakly impacted. Forecast for current account implies subdued global demand shocks. The swing in the fiscal position is roughly 6.5 percent of GDP, reflecting emergency supports measures. This is significant, and underpins shallower expected effects on employment and unemployment, as well as no deflationary dynamics in labour costs.

My view: Germany entered the pandemic crisis with already weak economy. 2019 growth at 0.6 percent was shockingly weak, with the economy skirting recession. Massive strength in the current account was reflective of weak domestic demand and the economy dependent on growth momentum globally. This momentum is now severely disrupted, and I do not expect robust global recovery outside domestic demand. In other words, my view is that worldwide exports are unlikely to rebound robustly in H2 2020, putting severe pressure on net exporting economies, like Germany and Italy.

So, whilst 4+ percent drop in full year GDP might be fine, I would expect closer to 5-5.5 percent decline (reflective of weaker prices), and much more pronounced impact on unemployment and employment levels.

22/10/17: Oh my... Germany Looks Like Japan ca 2000-2001?

A pic worth a 1,000 words:

Via Holger Zschaepitz @Schuldensuehner

In simple terms, despite its current fortunes, on the longer time horizon, German economy is suffering the same fate as the Japanese one, with two caveats:

1. A lag of a couple decades; and
2. An adjustment for institutional structures (e.g. greater openness to migration).

These are reflected in the distance between the German yields today and the Japanese yields in the 1990s and 2000s. That distance, of some 1,000 basis points, is material to the debt carry capacity (meaning Germany has much greater borrowing capacity than Japan had back in the early 2000s). But it is also more uncertain, as ECB monetary policy cannot fully converge to the German conditions alone (it can be dominated by these conditions for quite a long while, but neither perpetually, nor fully).

So here we have it, folks, our value systems (reflected in demographics) have Japanified Germany... before our fiscal policies did... 

11/11/15: New Cost Estimates of European Refugees Crisis: Ifo

Back in September, German think tank, CESIfo estimated the cost of European refugees crisis to be at around EUR10 billion (Germany costs alone). Yesterday (with update today), the Institute released updated estimates:

Crucially, per above release, the Ifo pours some serious cold water on the commonly repeated in the media claims that refugees can provide a substantial boost to the German economy due to their alleged employability.

13/12/2014: CESIfo on Minimum Wage Effects in Germany

An interesting research note from Germany's CESIfo institute on the effects of minimum wage law change. The note, titled "Minimum Wage: German Firms Plan Price Increases, Staff Cuts and Reductions in Working Hours" is available (in German) here:
http://www.cesifo-group.de/DocDL/ifosd_2014_23_5.pdf

Basically, on January 1, 2015 Germany will implement a Federal minimum wage of EUR8.50/hour (see background here: http://www.bbc.com/news/business-28140594).

CESIfo undertook a survey of employers' expectations as to hiring and labour utilisation / demand changes expected following its introduction. The key point to note is that these are expectations reported by surveyed businesses, not the actual responses.

Per CESIfo German companies that will be affected by the minimum wage as of 1 January 2015 are planning to

• Increase their prices (26 percent)
• Reduce bonuses (23 percent), 
• Reduce payrolls (22 percent), 
• Reduce working hours (18 percent), and 
• Scale back investment activity (16 percent). 

Furthermore, "most companies are planning to implement a combination of these measures, and only 43 percent of the firms affected plan not to react at all… eastern German companies will be far more deeply affected than their western German counterparts by a ratio of 43 percent to 24 percent."

By sector, the impact is distributed as follows:

• "Service providers, and especially those in the catering and hotel industry, mainly intend to respond by increasing prices (31 percent)."
• "In retailing, responses to the minimum wage were primarily cited as staff cuts (29 percent) and shorter working hours (33 percent)."
• "In manufacturing, staff cuts (26 percent) ranked just above reductions in bonuses (23 percent) and raising prices (23 percent)."

So may be we'll see an uptick in German inflation in early 2015... to the delight of the ECB and the detriment of all of us reliant on its low interest rates... But it will be inflation of a different nature...

8/10/2013: German Voters Go For Status Quo... Redux: Sunday Times September 29, 2013

This is an unedited version of my Sunday Times column from September 29, 2013.


By any measure, last Sunday's German elections highlighted a resounding failure of the country electorate to connect with reality. Despite returning a number of historical outcomes, the voters reaffirmed the passive-conservative leadership mandate exercised by Angela Merkel since 2009. As the result, German policies are now likely to drift even farther away from the immediate needs of the euro area periphery, risking a renewal of the euro area crisis and a slowdown in the already less-than ambitious speed of European reforms. None of this is good news for Ireland.

The historical nature of the 2013 German elections is highlighted by the fact that Angela Merkel became the first euro area leader to be reelected as the head of state since the beginning of the Great Recession. And she has done it twice: first some 12 months into the crisis in 2009 and now 5 years from its onset. Ms. Merkel won the highest number of votes for her CDU/CSU party in 23 years. And she became the first German leader since the golden days of Konrad Adenauer back in 1961 to personally dominate the elections, instead of standing in the shadow of her party. Individually, all of these are rare events in modern German history. Taken together, they are probably unprecedented.

But herein lies the problem for all of us living outside Germany. The elections of 2013 have produced a strong mandate for doing nothing new when it comes to either the euro area or the larger Union reforms. The Chancellor re-elect retook the Bundeskanzleramt on a mandate of being a 'safe pair of hands'. The campaign her party waged focused on such important topics as charging foreign drivers for using autobahns. Instead of debating the core issues faced by the EU, and the role of Germany in this mess, voters largely engaged in navel-gazing. Satisfied with their relatively well-performing economy and receding immediate danger to the euro, they endorsed the leadership devoid of ideas, alternative views and aspirations. Not surprisingly, philosopher Jurgen Habermas declared the 2013 general election campaign a "collective failure" of the elites.

This means that the German elections left the core problems of the euro crisis unaddressed, raising the specter of renewed uncertainty about the future of the common currency area. This concern became immediately visible this week.

On Monday, ECB's Mario Draghi rushed to compensate for the policy paralysis signaled out of Germany by stating that the ECB is ready to deploy a new round of quantitative easing in the form of the third Long-Term Refinancing Operations (LTRO3). To remind you, the first two rounds of LTROs were the ECB’s ‘pre-nuclear option’ response to strategic threats to the euro area economy in late 2010-early 2011. The ‘nuclear option’ was the subsequent announcement of the stand-by quantitative easing programme, known as Outright Monetary Transactions (OMT). Mr. Draghi mentioning the prospect of renewing the LTRO scheme suggests that the ECB expects no change in euro area policies in the aftermath of last week’s elections.

Acknowledging this, Draghi also tried to push aside the pesky issue of the Greek Bailout 3.0. And in a direct reflection of the Berlin’s preferences, Draghi also downplayed the possibility of the ESM being licensed to provide financing cover for future bank failures.

Mr Draghi’s precautionary moves were timed perfectly. Following the elections, sovereign yields on all peripheral countries’ bonds rose relative to German bunds. Credit default swaps – insurance contracts underwriting sovereign bonds – also crept up. The markets are not buying the ‘return to status quo’ story as good news. This was contrasted by the domestic news which saw the German economic sentiment, as measured by the CESIfo index of economic conditions rise for the third month in a row. This marks fifteenth consecutive quarter of the CESIfo index reading above historical average. In contrast, euro area economic conditions index has been stuck below its historical average levels for eight quarters in a row through this September.

Since 2009 elections, Chancellor Merkel held back from directly leading the euro area and instead opted repeatedly to wait for an escalation of the crises before responding with un-prepared, often ad hoc and wrong-footed solutions. Best examples of this approach to leadership are the EU's failures in Cyprus and Greece. Both are directly linked to Ms. Merkel’s prevarication in the face of escalating crises. All were driven by swings in domestic public opinion, rather than by any cohesive principles.

For Ireland, this mode of leadership spells lack of progress on key issues.

Gauging German public opinion there is currently zero appetite to shift away from the pre-elections status quo in which the Irish crisis is seen as largely self-induced and peripheral to German interests. This means that Germany is likely to continue supporting Irish debt sustainability rhetorically, while opposing practical resolution of the debt overhang. This week, Ms. Merkel gave another loud endorsement to Irish Government policies during the crisis. As she did so, the Irish Government – usually not known for its skeptical pragmatism – was actively pushing the timeline for banking debts problem resolution out into the later months of 2014. My gut feeling is that we can expect this timeline to stretch beyond 2015. Instead of allowing restructuring of our banking debts, Berlin will nod approvingly to a precautionary line of credit for Ireland via set-aside stand-by facility at the ESM. This credit will be provided on current ESM funding terms, some 1 percent below the cost of IMF funding and with longer maturities. Which is the good news.

In exchange for this token gesture we will be required to strictly adhere to fiscal adjustment targets for 2015. We will be further subjected to a new multi-annual fiscal programme stretching into 2018-2020 to be supervised by the EU Commission. ECB – by proxy, the German government – will be watching from the shadows.

Meanwhile, as Mr. Draghi statement this week indicates, Germany will block ESM from having any powers in dealing with future banking crises. Our retrospective banks debt deal will then have to wait until a new funding facility, most likely administered by the ECB, comes into place. Pencil that for sometime in 2016. Pushing legacy debts incurred by the Exchequer as the result of rescuing our banks into the hands of the ECB is likely to cost us. Frankfurt can, and potentially will, demand something in return for this. One thing the ECB can ask for is accelerated sales of the Central Bank-held Government bonds (the fallout from the Promissory Notes deal done earlier this year).  The ECB already has the power to do so. It also has a direct incentive: the bonds are set against our banks borrowings from the euro system. Of course, this will mean that we will be trading one debt for another, as accelerated sales of bonds will erode the temporary fiscal ‘savings’ achieved by the Promo Notes restructuring.

But the cost of the EU/German ‘assistance’ for Ireland will most likely extend further than bonds sales acceleration and new fiscal targets setting. German political agenda is well-anchored to continued saber-rattling on the need for corporate tax harmonization across the EU. With the 2009-2011 Franco-German tax harmonisation initiative all but dead, the focus in the next two-three years will shift toward advancing the consolidated common corporate tax base (CCCTB) proposals that suit German interests more than any other form of tax coordination. Based on her record to-date, Ms. Merkel is a fan of the CCCTB as are all of her potential coalition partners and the German voters.

German elections are also promising to create less certainty as to the structural reforms in the European Union space. Last Sunday’s results produced strong votes for the anti-euro party, Alternative fuer Deutschland (AfD). The party also did well in the previously held local elections. The new Merkel-led coalition will have to show caution when facing any prospect of further harmonisation and consolidation of power in Brussels.

When it comes to structural reforms, German public prefers for euro area to focus on specific hard fiscal targets and on replicating Germany's own structural reforms of the 1990s. While such reforms can be beneficent to the euro area peripheral states, for Ireland they offer only marginal gains. German reforms of the 1990s have focused on two core policy pillars: increasing flexibility of the labour markets and decreasing the burden of the welfare state. These came at a cost of continued consolidation of German economy around larger enterprises and suppression of domestic demand and household investment.

Ireland today requires some reforms in the social welfare system. But we also need to break up our dominant market players in the domestic sectors and to increase our households’ spending and investment.

In short, in the wake of the German elections, there is preciously little that Ireland can expect in terms of the European support for our recovery. Europe, with German blessing, will most likely lend us a hand to help us out of the 'safe' boat of the Troika programme. Thereafter, swimming in the turbulent waters of the Eurozone crisis will be up to us. Let's hope Budget 2014 provides generously for flotation vests.

BOX-OUT:

Marking the fifth anniversary of the Banking Guarantee of September 2008, there are plenty of stocktaking exercises going around. Yet, for all the ‘Fail’ marks being rightly handed out to the Guarantee, all signs in the streets suggest we have learned next to nothing from our past errors. This week offers at least two such examples. Firstly, the crisis showed that a non-transparent system of monitoring and managing financial risks will result in the connected-few gaming the entire system. This week, Minister Noonan intervened in the process of winding down the IBRC, bending the rules that normally apply to company liquidations. Granting anonymity to the funders of the toxic banks comes as a priority in this country. Unintended consequence of this is that it also perpetuates the cronyist relationship between the financial services and the state – exactly the outcome we should have learned to avoid. Secondly, we know that principles-based regulations require swift, robust and unambiguous enforcement. Also this week, the Central Bank effectively shut the door on any further investigations into Anglo dealings with the regulators that could have arisen from the infamous Anglo Tapes. Five years in, there are zero prosecutions, and scores of closed investigations. To paraphrase Bon Jovi’s famous refrain: the less we learn, the more things stay the same…

27/8/2013: Ifo Business Expectations: Germany, August 2013

On foot of my previous post (http://trueeconomics.blogspot.ie/2013/08/2782013-ifo-business-climate-survey-for.html), here is a longer-term view of the role expectations play in co-determining / tracking the subsequent realisation of business conditions and climate under the Ifo index.

Answer is: not much. The same picture holds for 12 months lags.

In other words, as I said above: expectations (in the case of German businesses) are more conservative and less volatile than either current situation index or climate index. And this suggests that expectations tend to adjust to current climate imperfectly but stronger than lead the future index readings. For the forecasting purpose, it is probably the longer-run averages, in more complex econometric structures, that are more likely more indicative of the true underlying dynamics being declared under the expectations. In simple terms: don't read too much into short term changes (short-term being 12 months and less) in expectations...

Interestingly, the Ifo series are high quality data, unlike many other series, such as, for example, smaller economies' PMIs. Yet, to my knowledge, no one does any serious analysis of expectations and their predictive power for any of the regularly-released series on business activity. This just goes to show how simplistic the markets-related macro analysis can be.

27/8/2013: Ifo Business Climate Survey for Germany: August 2013

CES Ifo Business Climate figures for Germany are out today, showing further gains in underlying economic conditions and expectations forward.

Year on year, business climate index reading improved 5.2% to 107.5 in August 2013, with monthly improvement of 1.2%. 3mo average over the last 3 months was 106.5 against 105.6 average for the 3mo period through May 2013 and 103.5 3mo average through August 2012.

On business situation side, index rose to 112.0 in August 2013, up 1.7% on July 2013 and 0.9% on August 2012. 3mo average through August 2013 stood at 110.5, ahead of 109.1 3mo average through May 2013, but below 112.1 average through August 2012.

Business expectations index also rose in August to 103.3 from 102.4 in July, showing a monthly gain of 0.9% and an annual gain of 9.8%. 3mo average through August 2013 is at 102.7 against 3mo average through May 2013 102.3, suggesting that pick up in overall expectations has been rather subdued. This might be due to the index overall showing lower volatility around the mean than other two indices. In other words, conservative expectations are staying closer to the mean and watching if the rest of the series do catch up with expected expansion. 3mo average through August 2012 was 95.6, suggesting that overall, there has been some serious optimism built up over the last 12 months, further warranting some moderation in the rate of optimism growth forward.

Chart to summarise:

25/7/2013: BlackRock Institute latest survey results for global economic outlook: June 2013

The latest summary of the global growth conditions from the BlackRock Investment Institute. Click on the chart to open larger version. I have highlighted Ireland on the chart.

Blue bars reflect consensus on current phase of economic development (for example, in Ireland's case, current phase is seen as being recessionary by roughly 25% of respondents to the survey). Red dot corresponds to 6mo forward expectation (in Ireland's case, 50% of respondents expect recession in Ireland to either continue or to present itself again in 6 months time).

Note: this is the view of surveyed economists and not the view of the BlackRock II. The chart is based on the "trailing 3 survey reports for the other regions we poll. In our first month of this initiative, we collected the views of over 430 economists from more than 200 institutions, spanning over 50 countries"

25/7/2013: Ifo Business Climate Survey for Germany: July 2013

Ifo Business Climate Index for industry and trade in Germany is out for July. The index is up at 106.2 from 105.9 in June, marking the third consecutive month of improvements. Current situation index is at 110.1 in July, up from 109.4 in June and also marking third consecutive month of gains. expectations 6 months out remained relatively static at 102.4 against 102.5 in June. Expectations are struggling to gain solid footing, suggesting that businesses are perceiving current conditions (expansion) as being still at risk.

Per Ifo release: "Conditions in the German economy remain fair. The business climate indicator in manufacturing rose slightly. Satisfaction with the current business situation increased for the third month in succession. Business expectations declined minimally, but remain positive. …After last month’s sharp in-crease, export expectations fell somewhat. Firms nevertheless expect expansionary impulses from export business."

24/6/2013: Ifo Business Climate Survey for Germany: June 2013

German economy continues to grow, per latest Ifo Business Climate Survey for June 2013:

Basically, all three core indicators are above the water (>100), with

• Business Climate reading at 105.9, up on 105.7 in May and 105.1 in June 2012. 
• Business Situation reading slipped slightly to 109.4 in June from 110.0 in May and is down on 113.8 recorded in June 2012.
• Business Expectations forward are actually relatively soft at 102.5 in June, up on sluggish 101.6 a month ago and up on contractionary 97.1 in June 2012.
• Dynamics wise, Climate and Expectations readings in June were ahead of their 12mo average through May 2013, but Situation reading is basically flat. On 6mo average through May comparative, all indices are ahead of the average in June, save Climate which is flat.

Of four core subsectors, however, only Manufacturing is above water on expectations side. 

Net: strong performance, given prevailing conditions in the global and euro area economies, but no massive fireworks.

13/6/2013: Boom-time in German Building Industry?

Ifo published some new survey data on German economy. One that jumps out is the Architects Survey. Per Ifo (emphasis mine): "The business climate improved significantly at the beginning of the second quarter of 2013 and has not been as favourable since the German reunification boom at the end of the 1990s, according to the remarkable results of the Ifo Institute's quarterly survey of freelance architects."

Freelance architects "assessed their current business situation as significantly better than in previous quarters and business expectations have also improved compared to last quarter's assessments. 

• The share of architects surveyed who described their cur-rent business situation as "good" increased from 41% to 43%. 
• Business expectations also improved compared to last quarter’s assessments. The share of partici-pants that expressed scepticism about the future fell considerably from 16% to just 10%. 
• 57% of the architects surveyed signed new contracts in the first quarter of 2013. 
• Number of new contracts for detached and semi-detached houses in Q1 2013 is the same as in Q4 2012 - at a level that is almost twice as high as the low point reached in 2006 and 2007.
• Total number of new orders for the planning of multi-family buildings in Q1 2013 was around 150% higher than the figure just six months previously.

It's a boom-time in Germany and Angela might be feeling a bit more confident, assuming the euro news are not too bad come elections...

14/5/2013: Ending German Austerity... and then what?

Everyone is running around with the latest catch-phrase designed to phase out thought: Germany must end austerity. So, folks, what will happen should Germany really end austerity?

Whatever it might mean, suppose end of austerity implies Germany moves from the currently projected general government deficit of -0.31% of GDP to a deficit of -3.31% of GDP, thus increasing Government spending by EUR81 billion in 2013. What then?

1. Historically (since 1997 through forecast for 2018 by the IMF) EUR1 billion increase in German GDP is associated with EUR0.21 billion rise in German Current Account, although the relationship is not strong enough to call it statistically. In other words, Germans do not spend their surpluses on goods, like other economies do. They are more likely to increase their current account surpluses when income rises.
2. Also, historically, EUR1 billion in German GDP growth is associated with EUR0.67 billion rise in German investment. 
3. Furthermore, shrinking Government deficits in Germany are associated with widening of current account deficits (see chart below) and declining overall investment in the economy
4. EUR81 billion in the euro area overall context is nothing but pittance, even before it gets diluted by German own internal demand.

Note: Change in current account balance is negative when current account deficit is falling

Let's not draw many causal conclusions out of the above, but the clear thing is: Germans do not tend to spend their budget deficits on imports of goods and services at any rate worth mentioning.

Herein rests the problem for the policy idiots squad: if Germans spend EUR81 billion more on Government, short of mandating that Berlin ships cheques out to the Euro Periphery, what on earth will this end of austerity do to help Ireland, Portugal, Spain, Greece or Italy? Add German tourists' bodies on the beaches of Italy and Greece? Fly truckloads of German youths to Spain for booze-ups? Increase sales of Fado music 700-fold? Restart bungalows sales craze in Lahinch? Open German savings accounts in Cyprus? Will these end Euro area periphery crises?

Neither one of the countries in the Euro periphery makes much of what Germans want. Irish trade with Germany is robust, but it is dominated heavily by the non-Irish corporates who channel tax arbitrage via trade, leaving little on the ground in Ireland to call 'national income'. 

So what if Germany 'ends austerity'? German demand for goods and services will go up. But it will be demand for German-made and Core-made goods and services, plus stuff from Asia Pacific. It will also push German unemployment from 5.6% to 5.4% or maybe 5.3%, depending on how many more peripheral countries' emigrants Germany can absorb. 

These might be good things for Germany. But sure as hell, if German stimulus were to work like neo-Keynesianistas hope it will, pressure on ECB to keep rates low and banks liquidity ample will be reduced, while internal German rates imbalance will amplify. German bond yields might also rise, which will only add to the already hefty debt servicing pressures in euro periphery. Does anyone think it might be a good idea for ECB to hike rates then? No?

Truth is - there is no substitute for getting Euro periphery's economies in order. German stimulus or 'end of German austerity' can sound plausibly nice, but the real problem in the EU is not German sluggish demand (it is a part of German problem, to be frank, but not the major one when it comes to the Euro area as a whole). The real problem in the EU is lack of real, tangible, non-leveraged growth sources.

6/5/2013: Self-contradictions & EU Commission

Trapped in their own failures, EU 'leaders' are no longer simply contradicting each other - they are now contradicting themselves. And, I must add, via ever more apparent and bizarre statements.
Behold the latest instalment of absurdity from one of the multiple EU 'Presidents': the man in charge of the EU economic policies and performance, European Commission chief Jose Manuel Barroso. As reported in the EUObserver (http://euobserver.com/economic/120040), Mr Barroso stated that "What is happening in France and Portugal is not Merkel's or Germany's fault … The crisis and their problems are not a result of German policy or the fault of the EU. It is the result of excessive spending, lack of competitiveness and irresponsible trading in the financial markets."
Thus,

1. Loose monetary policy by the ECB that was custom-tailored to suit German needs during 2002-2007 period had nothing to do with the crisis in the peripheral states, despite the fact that it triggered vast inflows of capital from Germany (and other core states) into the euro area periphery, inflating assets bubbles left, right and centre, and leading to unsustainable debt accumulation in these economies.
2. ECB (heavily influenced by German ethos and political economy) and EU Commission and regulatory bodies' insistence on treating all sovereign bonds issued by the euro area states as risk-free assets on banks balance sheets (the main trigger for Cypriot crisis and the reason for massive transfers of banking sector costs onto taxpayers in Ireland and other member states) had nothing to do with Berlin or with Berlin's insistence on closing its eyes on what was happening in regulation / enforcement EU-wide.
3. Berlin's inability to reign in German (among other) banks' gross misplacing of risks in interbank lending to other euro area banks had nothing to do with the crisis.
4. Berlin's insistence, repeated parrot-like by Mr Barroso and his colleagues in the Commission, that the whole crisis can be addressed via fiscal adjustments (recall, that was the position the EU Commission occupied for the last 6 years) and current account rebalancing has nothing to do with mis-shaped economic policy responses across the EU since 2008 crisis onset.
5. Berlin's 'guidance' toward internecine and economically illiterate Fiscal Compact, eagerly endorsed by Mr Barroso and his colleagues in recent past, has nothing to do with the failure of Europe to respond to the crisis.
6. Berlin's opposition to the half-baked EU ideas about stimulating growth in euro periphery that shut the door on any real stimulus has nothing to do with the crisis.
7. Berlin's opposition to increasing domestic demand and abandoning contractionary pursuit of current account surpluses, also noted by Mr Barroso's Commission in the past, had nothing to do with the crisis duration or depth.

Mr Barroso also claimed that Chancellor Merkel is "one of the only [leaders], if not the only leader at the European level who best understands what is going on."

Really? Suppose so. In this case, Mr Barroso has either no clue what is going on, or simply doesn't care to be consistent with his own exhortations of the recent past, because he openly and directly contradicted Ms Merkel couple of weeks ago by claiming that 'austerity was overdone' and had "reached its limits."

Irony has reached so far in Mr. Barroso's waltzing across the ideological & economic policy landscape that according to the EU's 'President', Ms Merkel's brilliance also encompasses the fact she is presiding over German economy currently sliding toward a recession. IMF analysis shows real GDP growth in Germany will fall from 4.024% and 3.096% in 2010 and 2011 to 0.865% and 0.613% in 2012 and 2013. This might be better-than-average record for the euro area, but it is hardly an achievement worth praising.

Someone should point to Mr Barroso that eating one's cake (taking a populist position against austerity, and thus Ms Merkel) and having it (taking an appeasing position toward the major architect of all economic policy blunders so far deployed in Europe since the onset of the crisis) is just something that doesn't happen outside the make-belief world of Brussels.

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

• In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
• On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
• On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.

2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

• In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
• Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.

Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

19/4/2013: Watch out for overheating Euro area growth...

Ifo Institute issued its updated forecasts for Germany and Euro area 2013-2014. Here are the summaries:

As Euro area aggregate forecast shows, the European Century is rolling on with expected 0.4% annual expansion in real GDP in 2013 and 0.9% roaring growth in 2014 expected. Meanwhile, the speedy engine for Euro area growth - Germany - is expected to post 0.8% boom-time growth in 2013 and globally impressive, future path-inspiring expansion of 1.9% in 2014.

Clearly, we must be watching out for a positive output gap emerging soon, as both economies will be overheating in the next 19 months from all this tremendous growth...

23/3/2013: And the Strong Are Yet to Become Strong: German Debt Sustainability

A very interesting paper by Burret, Heiko T, Feld, Lars P. and Koehler, Ekkehard A., titled "Sustainability of German Fiscal Policy and Public Debt: Historical and Time Series Evidence for the Period 1850-2010" (February 28, 2013). CESifo Working Paper Series No. 4135. Available at SSRN: http://ssrn.com/abstract=2228623

Here's from the abstract:

"In the last decades, the majority of OECD countries has experienced a continuous increase in public debt. The European debt crisis has prompted a fundamental re‐evaluation of public debt sustainability and the looming threat of sovereign debt default. Due to a multitude of large scale events in its past, Germany is far from being an exception: In fact, Germany’s peacetime debt‐to‐GDP (Gross Domestic Product) ratio has never been higher."

And a chart:

[Click on the chart to enlarge]

On methodology: "In this paper, we analyse the sustainability of Germany’s public finances against the standard theoretical back‐ground using a unique database, retrieved from multiple sources covering the period from 1850 to 2010. Multiple currency crises and external events offer anecdotal evidence, contradicting the historical perception of Germany as the poster child of European public finance. Given these corresponding breaks in time series, the empirical analysis is conducted for the sub‐periods 1872‐1913 and 1950‐2010. In addition to an anecdotal historical analysis, we conduct formal tests on fiscal sustainability, including tests on stationarity and cointegration and the estimation of Vector Autoregression (VAR) and Vector Error Correction Models (VECM)."

And the punchline: "While we cannot reject the hypothesis that fiscal policy was sustainable in the period before the First World War, the tests allow for a rejection of the hypothesis of fiscal sustainability for the period from 1950 to 2010. This evidence leads to the conclusion that Germany’s public debt is in dire need of consolidation. Albeit a much needed reform, the incompleteness of the German debt brake will have to be addressed in the coming years, in order to ensure that fiscal consolidation actually takes place"

[Skip below to see the more extensive summary of conclusions]

And the recent experience? Here are the economic fundamentals pertaining to the cost of capital and growth:

A descriptive table of stats summarising the overall performance:

And public expenditure levels (alongside revenue and balances)

So the results after skipping through loads of rigorous tests are:

"After the experience of the two World Wars, the German population is quickly alarmed when debt levels appear to be rising to unsustainable levels. This holds particularly for recent years, as Germany’s debt‐to‐GDP ratio has never been higher in peacetime than today...

In this paper, we analyse sustainability of German public finances from 1872 to 2010. Given the breaks in the data series, in particular those induced by the two World Wars, the main analysis is conducted for the sub‐periods 1872‐1913 and 1950‐2010. …While we cannot reject the hypothesis that fiscal policy was sustainable in the period before the First World War, this only holds if we do not allow for trends in the cointegration relation. The hypothesis of fiscal sustainability for the years 1950 to 2010, on the other hand, must be rejected. After the Second World War, German public finances have become unsustainable.

This evidence leads to the conclusion that public finances in Germany are in dire need of consolidation. In fact, the introduction of the debt brake in the year 2009 is a much needed reaction to this development. Although such fiscal rules always have their loopholes and are necessarily incomplete, they usually have some success in restricting public deficits and debt (Feld and Kirchgässner 2008, Feld and Baskaran 2010). The incompleteness of the German debt brake will have to be addressed in the coming years in order to ensure that fiscal consolidation actually takes place. One shortcoming of the new debt rule requires wider ranging reform, however: The Länder (including their local jurisdic‐tions) not only have huge consolidation requirements, they also do not have the tax autonomy to balance the spending demands on their budgets. The next major reform of the German fiscal constitution should thus allow for more tax autonomy at the sub‐federal level."

22/02.2013: A small cloud over German economy's silver lining

Released today, the Ifo Business Climate Index for German industry and trade "rose significantly by over three points in February. This represents its greatest increase since July 2010. Satisfaction with the current business situation continued to grow. Survey participants also expressed greater optimism about their future business perspectives. The German economy is regaining momentum."

These are positive news for the German economy and it needed some cheer up. But, alas, good news, like every proverbial silver lining, do come with small clouds attached. Since I am not in the business of spinning the same story as everyone else, I will focus on some of these clouds in the note. You can read the actual press release and see data here: http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2013/Geschaeftsklima-20130222.html

Good stuff: "In manufacturing the business climate indicator rose sharply. This was specifically due to a considerably more optimistic business outlook. Manufacturers also expressed greater satisfaction with their current business situation. Export expectations increased and are now above their long-term average once again."

"In construction the business climate index continued to rise sharply, primarily due to a far more optimistic business outlook. The business outlook reached its highest level since German reunification. Satis-faction with the current business situation also continued to grow."

Truth be told, in the industrial sectors, the entire rise in the index can be explained by the above two sectors, with wholesale and retail sectors staying at and below the zero mark (respectively). Internal economy seems to be still in poor shape, although the rate of decline clearly dropped in wholesale sector, whilst accelerating in the retail sector.

In services, business climate also rose impressively, but the entire increase was due to business expectations, while the current situation assessment deteriorated.

What worries me more is the headline indices for all sectors.

• Business Climate index rose to 107.4 in February 2013 - up +3.0% m/m, but it was down 1.9% y/y. 3mo average through February 2013 is at 104.7, up on 101.0 3mo average through November 2012, but down 3.4% on the 3mo average through February 2012.
• Business Situation improved much less dramatically and is lagging well behind overall climate reading. The sub-index on current situation rose to 110.2 in February 2012 (+1.9% m/m), but is down 6.1% y/y. 3mo MA through February 2012 is down 7.2% y/y.
• As the result, most of the gains in the overall Climate reading were due to, yep, expectations of future changes. Expectations rose to 104.6 in February, up 4.0% m/m and up 2.3% y/y. Expectations were also up on 3mo average reading +0.6% y/y. 

The latter point is problematic. You see, expectations surveys of businesses are often more indicative of the direction, rather than of the magnitude, of future changes. And so is the case with the Ifo index.

Per chart above, whilst current conditions are strongly correlated with the business climate in the same period, it turns out that future expectations are much more strongly linked with current climate (and conditions) than with what they are supposed to predict - namely, future conditions. In fact, the same result holds regardless of whether we choose a forward lag on expectations 6mo out or 12mo out. There is simply no connection between m/m changes in reported expectations and the future business climate realisations.

So, while we sound victory trumpets around the headline 'strong rise' in the Ifo index, we should be aware of the fact that most of this rise is indeed being driven by highly suspect expectations.

But wait, things are even worse than that. Take a look at historical volatility in indices. Based on two standard deviations metrics (sample and population), m/m changes in sub-indices post historical standard deviations of 1.4 for Business Climate, 1.7-1.8 for Business Conditions and 1.7 for Expectations. Which, basically, means that 3% rise in headline index was basically statistically indifferent from zero change, and likewise was 1.9% rise in Business Conditions index. Only the 4.0% hike in Business Expectations was possibly statistically significant.

So here wi have it - the most questionable in quality indicator was the most influential driver of the February gains and was also the most likely candidate for being statistically distinct from zero in terms of its m/m expansion.

30/1/2013: German Economy: Returning to zero growth in January 2013

Germany's CESIfo published the latests (January 2013) assessment of the state of the German economy in Manufacturing and these are slightly more upbeat than at the end of Q4 2012, albeit with some clear seasonal supports.

"In manufacturing the business climate indicator continued to rise. Manufacturers are more satisfied with their current business situation than last month. The improvement in expectations with regard to future business developments continued into the New Year. Optimism is returning. After three successive declines, capacity utilisation rates also rose."

As per data below, in manufacturing 'optimism' is not exactly 'returning', but rather 'pessimism is receding', as business expectations remain below 0 on balances:

"In wholesaling, on the other hand, the business climate clouded over. Wholesalers are less satisfied with their current business situation and slightly more pessimistic about future business developments. In retailing the business climate indicator rose somewhat. This was due to a slightly more positive assessment of the business situation, while retailers’ business expectations remained unchanged.

In construction the business climate index rose sharply. This was primarily due to far more optimistic expectations, which last reached such a high level in March 2012. Assessments of the current business situation also improved."

It is worth noting that in Construction sector, it was business expectations that drove overall index up sharply and these are exceptionally seasonally-driven:

 However, as balances data below shows clearly, three of five sub-sectors continue showing weaknesses:

Overall, the three core aggregate series are above 100 for the first time since May 2012 (good news), but at levels that are signalling stagnant or very weak growth.

• Climate indicator reading is at 104.2 - only sixth highest reading in last 12 months, and substantially below 108.2 reading in January 2012;
• Situation indicator is at 108.0, which is only 10th highest reading in last 12 months, and well below 116.3 recorded a year ago.
• Expectations are at 100.5, marking 5th highest reading in 12 months, down marginally on 100.7 in January 2012.

In terms of overall impact on the euro area, the above figures suggest that the January 2013 eurocoin indicator-based forecast (see details here) of -0.4% growth in January 2013 should be more moderate. Not enough data yet to recompute the actual forecast figure from -0.4%, but I believe it can be closer to -0.2-0.1%.