Archive for the ‘Germany’ Category

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Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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Good news, it appears, comes in threes. For Spain, it most certainly has been a hat-trick, and we are talking football. If you like your forecast to be made via the prism of half-full crystal balls, then this may be reason to celebrate. Cynics may think differently, however.

Firstly, an index out earlier tracking Spanish manufacturing hit a 24-month high. The latest Purchasing Managers’ Index (PMI) for Spanish manufacturing and compiled by Markit hit 48.1 in May. Now that is news to please both pessimists and optimists. The optimists are celebrating because that was the highest reading since May 2011, and before Spain was in recession. The pessimists remain glum, however, because any reading under 50 is meant to correspond with contraction.

In other words, Spanish manufacturing is still shrinking, it is merely doing so at a slower rate. But then things don’t turn around overnight. The trend has been clear for some: the Spanish manufacturing PMI has been steadily improving. If the upward trajectory continues, then that will be bona fide good news.

Secondly, Spain posted its first trade surplus ever in March. Or at least it was the first surplus for as far back as the records go. Exports jumped 2.7 per cent, perhaps supporting the findings of the PMI. On the other hand, imports fell 13 per cent, that was the main factor behind the trade surplus, and is it really a good idea to celebrate the fact that Spanish households are so under the cosh that they can’t afford to buy foreign goods?

Thirdly, Spanish unemployment fell in May, with 98,286 joining the Spanish work-force. That is good news, of course it is, but not wishing to rain on Spain’s parade, it should be pointed out that Spanish unemployment is currently 26.8 per cent. So Spain needs to see several million more jobs created before it can celebrate. In any case, the main factor behind May data was the tourism trade, and that is seasonal, meaning May’s boost may prove to be a one-off.

Looking at the bigger picture, it does rather look as though Germany is now exporting its economic model to Spain, and there are some parallels between Spain today and Germany during the early stages of the Schroder reforms.

You may recall in the late 1990s and early noughties the German economy looked a lot like Japan, a once seemingly unbeatable economic machine appearing all beaten. But Gerhard Schroder, then Angela Merkel made tough reforms. They hurt. German wages fell;corporate profits in Germany rose. Right now, many Germans are unhappy about bailing out the rest of Europe because they see no sign that indebted Europe is willing to make the kind of sacrifices they themselves made ten years or so ago.

But is the so-called Germanification of Europe such a good idea? The result of rising German company profits was, in fact, a substantial rise in Germany’s savings, and as investment did not rise in tandem with savings, the result was German money flooded abroad, boosting asset prices in, among other countries, Spain.

The global economy, perhaps even Europe, cannot afford to see a rise in planned savings without a corresponding rise in investment. For the global economy, savings must equal investment. This is an economic truism. If savings rise, but investment does not, there must be an immediate offset. Either some sectors of the economy must run up debts equalling the short fall between savings and investment, or the economy must contract.

Either way, aggregate savings must equal aggregate investment. Germanic economics, when applied globally, may lead to global recession, even depression.

© Investment & Business News 2013

The data was revealed a week or so ago. It is pretty clear cut. According to the ECB, the median wealth of the Spanish is 183,000 euros, 172,000 euros for Italians, 75,000 for the Portuguese, and a stunning 267,000 euros in Cyprus. In contrast, median wealth in Germany is just 51,000 euros.

So that’s it then. The problem is not that the poor old Spanish and Cypriots are being pulverised by the vicious EU, which is being prompted by Germany into punishing them for mythical misdeeds. Instead, the real problem is that poverty stricken German households barely have two cents to rub together.

The solution is simple enough: tax ‘em. Have a wealth tax. And where will it end? Will the meat in your freezer – beef, horse or otherwise – be seen as wealth and subjected to tax?

There is an alternative take. Writing in the ‘FT’, Wolfgang Munchau argued that the ECB survey was in fact being taken out of context. For one thing, he said median wealth is a meaningless guide. He said: “If you want to compare across countries, it is better to take the mean.” Mr Munchau suggested that if we use mean wealth as the guide, then Germany’s does not lag behind troubled Europe as much as the quoted data suggests. It is not clear that Mr Munchau is right here, however. After all, median data is the better measure for telling us the position of most people, and is not distorted by a small number of people with massive wealth.

But Mr Munchau made a more substantive point. Actually the differences in wealth are a symptom of the euro – that is to say, a Cypriot euro has less value than a German euro, hence Cypriot assets appear to be worth more.

Others question the limitation of the ECB data, and say it does not take into account savings in pension schemes.

But there are other more important points. For one thing, the ECB survey relates to asset values from a couple of years ago. Asset prices across much of troubled Europe have crashed since.

Besides we all know that in Germany the housing market is seen as less important. The Germans do not celebrate house prices going up – they mourn.

The data does suggest an interesting idea though. Is the reason the savings ratio in Germany is relatively high, and thus consumption to income relatively low, because Germans have less wealth tied in the home, and after a period of rising house prices, appear to have less wealth?

©2013 Investment and Business News.

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All of a sudden the criticism is coming from everywhere. From George Soros to the Australian Treasurer; from the US Treasury Secretary to a former German Finance Minister, Germany’s leader Angel Merkel is being put under enormous policy to change tack. Is the great European experiment with austerity about to be ditched?

Perhaps one of the more surprising elements of the recent media coverage of the death of Lady Thatcher has been the focus on her views on the unification of Germany. Opinion seems divided on what, precisely, she believed, (whether unification should not happen at all, or should be merely delayed).

It is clear, however, that she had grave reservations. The unification of Germany probably led to acceleration in the European project; the idea being that a more closely integrated Europe, especially closer ties between France and Germany would act, as a counter weight to Germany’s new found might. Lady Thatcher, it appears, felt that not even that approach would work; that a united Germany would become virtually all powerful within such a union.

But the discussion on Lady’s Thatcher’s views on German unification is really about something else. Germany’s position within Europe is becoming increasingly unpopular and seemingly unrelated developments in the news have been sucked into the debate.

The criticisms of Germany have reached a new crescendo for two reasons. The first factor is the contrast with Japan. Its new programme of QE is not so much making the Eurozone look as if it is behind the curve, as making it look as if it is not on the curve at all. The second factor is the Cypriot debacle. The way this crisis was dealt with in Europe has left a nasty scar on the entire European project.

The US Treasury Secretary Jack Lew has been in Europe, and while he made some attempt to couch his words diplomatically, it is very hard not to interpret his comments as being hugely critical of Germany. He said at a press conference: “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.” Err so what plans are those, exactly? Europe does not go for demand management. The ethos in Europe seems to be austerity and let demand take care of itself.

George Soros has been in Frankfurt, and while there he made a speech slating Germany for the way it dealt with the Cypriot crisis and said Europe’s biggest economy should do one of two things. Either it should support euro bonds, whereby bonds issued by one government are guaranteed by all members, or Germany should leave the euro.

He said: “Germany has no right to prevent the heavily indebted countries from escaping their misery by banding together and using Eurobonds.” He added: “The financial problem is that Germany is imposing the wrong policies on the Eurozone. Austerity does not work. You cannot shrink the debt burden by shrinking the deficit.”

Meanwhile former Australian Deputy Prime Minister and the country’s Treasurer Wayne Swan has praised the monetary policies of the US and Japan. “Thank God for the Fed,” he said. He could just as easily have said “Curse the Eurozone.” It would have meant much the same thing.

In Germany, the former Finance Minister and now political rival to Mrs Merkel Peer Steinbrück used an interview in ‘Spiegel’ to slam Mrs Merkel’s focus on austerity. Nobel Laureate Paul Krugman used his ‘New York Times’ column to congratulate Japan on its new bold approach to QE: “Seriously,” he said, “this is very good news.”

Austerity can work if applied in isolation, but when it is applied across a continent as important to the global economy as Europe it can become self-defeating.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here