Monday, September 24, 2012

Ifo shows that German companies remain sceptical about Mario's economic magic

The downward slide continues. After an encouraging PMI reading last week, today’s Ifo could not follow up. The leading German confidence indicator continued its recent downward trend in September, dropping to 101.4, from 102.3 in August. This is the fifth consecutive drop, bringing the Ifo index to its lowest level since February 2010. With a drop to 93.2, from 94.2 in August, the expectation component is clearly in recessionary territory. The only upside in today’s Ifo report is that the current assessment component is still relatively high at 110.3.

Today’s Ifo index shows that German companies remain sceptical about the economic impact of Mario Draghi’s magic. Despite fears of a looming Eurozone break-up clearly fading away, German businesses are downscaling their expectations. It looks as if German businesses realise that keeping the Eurozone alive alone will not return growth quickly. The structural adjustments in Germany’s Eurozone trading partners will take time and will dampen demand for German products.

Looking further ahead, German growth should be affected negatively by at least three major factors: i) the slowdown of the global economy and the ongoing euro crisis, weighing on exports; ii) the worsening of the labour market, hampering domestic demand; and iii) the “perverse euro rescue factor”. Particularly the latter is an interesting twist. Throughout the euro crisis, the German economy has been benefitting from some positive side-effects, ie a weaker euro and very low interest rates. In the second quarter, these positive effects were already partly offset by weak demand from other Eurozone countries. Now, with increased rescue efforts, this balance could turn again. In the short run, a stronger euro and somewhat higher interest rates should dampen German growth but in the long run the positive impact from a stabilised Eurozone should prevail.

Today’s Ifo confirms our view that the German economy could see a contraction in the third quarter. Up to now, the real economy held up rather well, despite gradually deteriorating confidence indicators. Even the third quarter started on a very positive note. While industrial production and new orders rebounded in July, only retail sales were down, illustrating the relative robustness of the economy. However, it is doubtful that the decoupling between hard and soft indicators can last for long.

Tuesday, September 18, 2012

ZEW points to soft landing of German economy

Soft landing continues. The German ZEW index increased in September on the back of the latest stock market rally and calm in the euro crisis. The ZEW index which measures investors’ confidence now stands at -18.2, from -25.5 in August; the first increase since April. However, the ZEW index is still far below its historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to its lowest level since June 2010.

The relative calm in the euro crisis since the beginning of August seems to have comforted financial analysts. The German stock market has increased by more than 10% and fears about a looming break-up of the Eurozone have also disappeared. However, at the same time, the relative calm in the euro crisis has also created some adverse effects for the German economy. The euro exchange rate appreciated some 8% against the US dollar and oil prices increased by almost 10%. As a consequence, and somewhat ironic, the tail winds for the German economy, caused by the crisis, are fading away.

The German economy stands at another crossroads. After a strong first half, all sentiment indicators are pointing to an increased recession risk. However, the significant drop of sentiment indicators over the last months is not matched by the real economy. The third quarter, for example, also started on a very positive note. While industrial production and new orders rebounded in July, only retail sales were down, illustrating the relative robustness of the economy. However, it is doubtful that the decoupling between hard and soft indicators can last for long.

Looking ahead, weaker demand for German exports, both from Eurozone and non-Eurozone countries, should increasingly dampen growth in the period ahead. Moreover, with first signs of the labour market cooling off, private consumption should also remain moderate. Only domestic investments and, above all, construction seem to remain relatively crisis-resistant.

After more than a 3-year stretch of almost non-stop growth and an impressive average quarterly growth rate of 0.7% QoQ, the German economy s finally approaching for a landing. A soft, and not a hard, landing.

Enjoying the silence

It was the week of relief. The German Constitutional Court’s ruling on the ESM and the Dutch elections were a blow to eurosceptics, pushing EMU break-up speculations away and leading to positive reactions on financial markets. The meeting of Eurozone finance ministers in Cyprus and yesterday’s comments by German chancellor Merkel, however, showed that several important issues still remain unsolved.

In the short term, Spain and Greece should get the most attention. Many market participants expect Spain to be the next one in line to ask for a bailout, even if it is a bailout light, and consequently be the first country to fall under the ECB’s new OMT programme. So far, however, no decision has been taken and it increasingly looks as if nothing will happen before the ESM has become operational (expected date 8 October) and the regional elections in Spain (21 October). By then, the Troika should finally have presented its report on Greece. There seems to be a growing consensus among Eurozone policymakers to give Greece more time as long as it does not cost more money. Whether this is feasible or pure magic remains to be seen. Yesterday, German chancellor Merkel again put forth her hand to Greece, stressing that she wanted Greece to stay in the Eurozone and that Germany was ready to help. It is up to Greece to grab the hand.

Unsolved short-term issues are not the only unfinished business in the Eurozone. The biggest work in progress – steps towards further integration – also proves to be more cumbersome and difficult than some euro-optimists might have thought. The first building block towards further integration, a banking union, was presented last week, but so far all Eurozone member states only embrace the principle of Eurozone bank supervision but largely disagree on the details. Over the last couple of days, the German government has tried to slow down the pace of a fully-fledged Eurozone bank supervision. Given the strict German opposition, a joint Eurozone deposit insurance scheme has more or less been postponed until a very distant future. More generally speaking, the longer the negotiations on the entire building blocks for a “genuine economic and monetary union” will last, the more difficult it could be to get Germany on board. Why? It will be election time in Germany next year.

The latest events have bought more time for the Eurozone. However, neither the ECB’s announced OMT programme, nor the German Court’s ruling on the ESM nor the Dutch elections have improved the fundamental situation of Eurozone economies. Spanish unemployment remains high, Italy and France still suffer from a lack of competitiveness and Greek debt has not become any more sustainable. Moreover, the roadmap towards further Eurozone integration remains a bit vague and there are obviously still diverging views. In sum, still a lot of unfinished work. It would be a false conclusion to think that the Eurozone has suddenly become a hunky dory country in which they play Depeche Mode all day long.

Thursday, September 13, 2012

Het is nog wat te vroeg voor de Ode an die Freude

Het leek wel alsof de hele wereld gisteren naar Karlsruhe keek. Het Duitse hof is de voorbije jaren uitgegroeid tot een belangrijke macht in Duitsland. Misschien zelfs de belangrijkste macht. In ieder geval is het zo machtig dat het al vaker belangrijke politieke en wetsvoorstellen van de regering-Merkel heeft teruggestuurd en afgewezen. De angst dat het Hof dat nu ook met de Europese reddingsplannen zou doen, heerste al weken. Die angst bleek gelukkig onterecht. Het uiteindelijke oordeel was in feite veel minder angstaanjagend dan verwacht. Het lijkt bijna alsof het Hof slapper is geworden. Het kwam met het algemeen verwachte 'ja, maar...', maar de 'maar' was veel minder sterk dan verwacht. In feite zijn het niet meer dan twee formaliteiten die nog nodig zijn voordat de Duitse handtekening onder het ESM-verdrag kan worden gezet. Het Hof eist dat de Duitse bijdrage aan het reddingsfonds ESM niet hoger mag zijn dan de in de ESM-statuten oorspronkelijk vastgelegde 190 miljard euro. Dat moet nog in een internationale wet worden gegoten.

Interessant is dat het Hof geen definitief plafond heeft gevraagd op de grootte van het ESM. Ook na gisteren kan het bestedingsvolume van het ESM nog steeds worden verhoogd. Alleen moet het worden goedgekeurd door het Duitse parlement. Daarmee heeft de Duitse vertegenwoordiger in het ESM een de facto vetorecht. Bovendien eist het Hof dat de immuniteit en de zwijgplicht van ESM-bestuurders wordt afgezwakt. Het Duitse parlement zal regelmatig moeten worden geïnformeerd over alles wat het ESM doet. Zeg nu zelf, er waren in het verleden al veel fellere en meer spraakmakende oordelen van het Hof. Horrorscenario's waarin het Hof een permanent recht op inspraak en inzage voor het parlement zou eisen, werden niet bewaarheid. Het lijkt bijna alsof het Hof slapper is geworden. Of merkt nu de tweede, ooit zo heilige, Duitse instelling dat het de Europese trein niet kan stoppen? Voor Europa is dat duidelijk goed nieuws. De eurozone beschikt nu eindelijk over een geladen bazooka. Een bazooka die bestaat uit 500 miljard euro leencapaciteit van het ESM en de mogelijke, zelfs ongelimiteerde, obligatieaankopen van de ECB. De crisis is daarmee echter nog niet opgelost. De fundamentele problemen blijven. Noch de ECB, noch de uitspraak van het Hof verlaagt de werkloosheid in Spanje, verhoogt de concurrentiekracht van de Franse en de Italiaanse economie of verbetert de houdbaarheid van de Griekse overheidsfinanciën. Ook voor Angela Merkel is de uitspraak van gisteren goed nieuws. Het is een duidelijk duwtje in de rug voor haar Europese politiek, die er een is van voorwaardelijke integratie. Tegelijkertijd is de uitspraak van gisteren echter ook een waarschuwing. Hoewel het Hof op het eerste gezicht milder is geworden, wordt tussen de regels nog steeds duidelijk gemaakt dat er grenzen zijn aan meer integratie in de eurozone. Het Hof legt nog steeds heel veel nadruk op de begrotingsverantwoordelijkheid van het Duitse parlement, houdt niet van onbeperkte financiële steun voor andere landen en waakt over de democratische invloed op Europese beslissingen.

Dit maakt heel duidelijk dat verregaande integratie, zoals bijvoorbeeld gisteren door Commissievoorzitter José Manuel Barroso geëist, met de huidige Duitse grondwet en het Duitse Hof zeer moeilijk zal worden. Een politieke unie of een begrotingsunie lijken zeer onwaarschijnlijk. De rode lijn van de rode rechters uit Karlsruhe mag dan al iets dunner zijn geworden, ze maakt het leven van Merkel niet makkelijker. Een groeiend aantal Duitsers kijkt met een raar gevoel in de onderbuik naar Europa. Ongeveer 37.000 mensen hadden de klacht waar het Hof zich gisteren over uitsprak mee ondertekend, een kleine meerderheid van de hele Duitse bevolking had gehoopt op een 'nee' van het Hof en een ruime meerderheid is tegen meer financiële hulp voor Griekenland. Het zal schipperen blijven tussen kleine stappen richting integratie en stoere taal voor de Beierse kroegbezoekers. Zo'n strategie kan nog een tijd goed gaan, maar de vraag is hoe lang Merkel die spagaat vol kan houden. Uiteindelijk zal de enige weg tot meer eurozone-integratie voor Duitsland via een referendum moeten passeren. Dit is de enige formele manier om de Duitse grondwet aan te passen. De opluchting na gisteren is groot. Eventjes leek het zelfs alsof in de Brusselse gebouwen van de Europese Commissie de 'Ode an die Freude' werd gespeeld. Dat is misschien iets te voorbarig. De crisis is nog niet opgelost. Er is alleen weer meer tijd gekocht. Anders gezegd: de monetaire en juridische autoriteiten van de eurozone hebben hun taken vervuld en hebben van hun kant alles gedaan om de monetaire unie te laten overleven. Het lot van de eurozone ligt nu volledig in de handen van de landen en politici zelf. Alleen als ze hun huiswerk maken, zal de euro overleven. Beethoven moet nog even wachten.

Dit stuk verscheen vandaag in het Belgische dagblad "De Tijd"

Wednesday, September 12, 2012

German Court says "yes, but..." to ESM

More relief for the Eurozone. The German Constitutional Court ruled in favour of the ESM. The strings attached to the Court’s ‘yes’ seem softer than in past verdicts.
In its long-awaited ruling, the German Constitutional Court yesterday gave the green light for the ESM and the fiscal compact. The Court said “yes, but…”, adding some conditions to the German approval. As expected, all emphasis was on preventing unlimited financial liability for German tax payers and ensuring that the German parliament remains responsible for the budget. The “but’s” in the Court’s verdict are small but significant.
The Court ruled that German liabilities have to be capped at the current contribution of 190bn euro. This cap should be mandatory under international law. Any future increase of the ESM’s capacity would require approval by the German parliament. Moreover, the Court ruled that the clauses on immunity and professional secrecy for Board members of the ESM should not apply for the information flow to the German parliament. This is an indirect accountability clause. As a consequence, German president Gauck should now be able to sign the Treaty once the cap on the German contribution has been laid down in international law.
At least at first glance, the Court’s ruling surprises somewhat by the absence of stricter conditions. The Court did not ask for definite limits and did not identify violations of the democratic principle.
Within less than a week, the Eurozone has finally received its long sought-after impressive bazooka: conditional but unlimited ECB bond purchases and the ESM which provides a new fresh lending capacity of 500bn euro. Of course, it is a bazooka with potential risks and side-effects. As a result, Eurozone governments have now received more time to do their homework, implement reforms and austerity measures. Today’s ruling has not solved the crisis, neither has last week’s ECB decision. However, after monetary and legal authorities have done their part, the destiny of the Eurozone is now exclusively in the hands of governments.

Thursday, September 6, 2012

Mario Draghi's pudding

At today’s meeting, the ECB kept interest rates on hold and presented details of its new bond buying programme. Mario Draghi truly presented his “believe me it is enough”. Now the ball is back with Eurozone governments.

The ECB’s macro-economic assessment was clearly not top priority of today’s meeting. The ECB’s staff projections have hardly received so little attention as today. In its macro-economic assessment, the ECB acknowledged a further deterioration of the economic situation in the Eurozone. In the latest ECB staff projections, GDP growth forecasts for both this and next year were revised downwards. ECB staff now expected GDP growth to come in at -0.4% (from -0.1% in June) and 0.5% (from 1%) for next year. As regards inflation, the projections were revised slightly upwards to 2.5% (from 2.4%) for this year and 1.9% (from 1.6%) for next year. As the economic assessment might still be too positive, a rate cut in the coming months looks still possible.

All eyes were focussed on the ECB’s possible plan for bond purchases. By keeping interest rates unchanged, the pressure to at least deliver on the plan had increased even further. And, indeed, ECB president Draghi delivered the new ECB bazooka: the so-called OMT (outright monetary transactions) programme.

With the start of the OMT, the old SMP will be officially put to an end. According to the ECB, the new OMT is aimed at “safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy”. A clear attempt to present it as a pure monetary policy tool and not as a way to finance governments in need. As expected, the OMT will be conditional on an EFSF/ESM programme. According to the ECB, such a programme does not necessarily have to be a fully-fledged bailout package but could also be a precautionary programme. As the ECB said “involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme”. In our view, all of this means that the ECB will only activate its OMT programme if a country in question has agreed on a so-called Memorandum of Understanding with the Troika and if EFSF/ESM engages in purchases in the primary market. The OMT will be focused on the short end of the yield curve on, in particular, sovereign bonds with a maturity of between one and three years. The OMT will not only be applied to future bailout candidates but could already be started for Eurozone countries currently under a macroeconomic adjustment programme once they start to regain bond market access (which seems to be a rather stringent condition in our view).

Bond purchases under the OMT programme will be sterilised and the ECB will not take a senior status on its holdings. When and how the ECB plans to intervene, however, was not disclosed. It seems as if there will not be any explicit targets. The ECB only plans to announce its purchases ex post on a weekly and monthly basis. In addition to the OMT programme, the ECB also announced that it will accept government bonds as collaterals independent of their credit ratings (except for Greek bonds).

All in all, the ECB has presented a big new bazooka which should help buying time. This is probably he furthest the ECB can go to help governments. The focus on the monetary policy transmission and strict conditionality should also calm the Bundesbank temper, even if they would not admit it. However, the emphasis on the transmission mechanism is also a danger as it still contains a logical contradiction. With the OMT, the ECB will only repair the transmission mechanism in countries with ask for EFSF/ESM. But what about the other countries? It remains a bit strange. For the time being, one thing is clear: never underestimate Mario Draghi. He clearly delivered on his “believe me it will be enough” announcement. A man, a word. But as he said himself: “the proof is in the pudding”.

Tuesday, September 4, 2012

ECB preview - Waiting for ground-breaking action

This week could be the most groundbreaking one in the ECB’s history. When the ECB meets on Thursday, it will discuss the details of its new bond-purchasing programme. For some, the new plan marks the final end of the Bundesbank doctrine; for others, it is a necessary evil to calm the crisis. It is obvious to us that Mario Draghi’s congeniality and some vague words alone will not have the same calming effect as in August. In our view, the ECB might eventually present targets for short-term bond yields linked to the refi rate. However, not all the detail might be revealed this week, perhaps because there is not yet full agreement within the Governing Council, but maybe also to keep pressure on peripheral governments.

Recession feeling increases. Anything else than a downward revision of the ECB staff projections would come as a surprise. Although second-quarter growth was slightly less dramatic than expected, thanks to strong German growth, all confidence indicators point to a further worsening of the economic situation. The best expectation for an end to the recessionary feeling is currently for the end of the year. A downward revision of the ECB staff’s growth projections could be a good justification for a rate cut at this week’s meeting. However, in our view, a rate cut would only become a policy option if the Governing Council cannot find an agreement on the new bond purchasing – a kind of sweetener.

All eyes on bond-buying plan. A further deterioration of the economic outlook should not be the main topic of this week’s meeting. All eyes are on the much-awaited plan for ECB bond purchases, an SMP 2.0. Two things seem certain: first, any ECB bond purchasing will be conditional on a country applying for an EFSF/ESM programme. Preferably, the ECB would even like to see the EFSF/ESM purchase bonds in the primary markets before it gets active in the secondary market itself. Second, the ECB will purchase only short-term bonds. For the rest, however, it remains almost anybody’s best guess what Draghi will present on Thursday.

How could it look like? In our view, the ECB will eventually present explicit targets for short-term bond yields (probably up to three years) under an SMP 2.0. Of course, explicit targets contain the risk of inviting speculative attacks. However, implicit or secret targets are harder to defend in a credible fashion. To avoid the issue of setting “neutral” levels for bond spreads and to stress the fact that SMP 2.0 is mainly targeted at the transmission of monetary policy, the ECB could actually link targets for short-term bond yields to the refi rate and not another benchmark bond.

High risks, and devil remains in the detail. Obviously, there are still many potential risks and unsolved issues in any new ECB bond purchases. In particular, the issue of conditionality should be more of a concern to the ECB than future inflation risks. Will the ECB implicitly put its destiny in the hands of the Troika, making bond purchases exclusively dependent on an EFSF/ESM programme? Moreover, issues of whether or not to sterilise also seem tricky, given the potential size of the new plan. Obviously, the new bond purchasing plan will bring the ECB into uncharted and dangerous territory. However, we believe that with the August announcements the ECB has already passed the point of no return.

Saturday, September 1, 2012

Letter from Brussels - Bruesseler Baustellen

Als Deutscher in Brüssel hat man es nicht einfach. Nicht nur, dass europäische Nachbarn einen ständig als Euro-Rettungsverweigerer beschimpfen, nur weil man nicht einsieht, dass deutsches Steuergeld ohne Gegenleistung in andere Länder gepumpt wird. Nein, auch weil man sich als deutscher mit Hang zur Ordnungsliebe gerne am Brüsseler Alltag stört. Die Straße vor meiner Haustür wurde dieses Jahr nun schon zehn Mal ausgebuddelt, zugeschüttet und wieder geöffnet. Jedes Mal für einen anderen Zweck. Fragen des „Wieso, weshalb, warums“ werden in Brüssel nur mit Kopfschütteln begegnet. Das ist nun mal so. Eine unübersichtliche, scheinbar chaotische Strategie ohne deutliches Ziel? Das gibt es nicht nur im Brüsseler Straßenbau.

Ähnlich wie in meiner Brüsseler Straße werden auch in der Euro-Krise regelmäßig neue Baustellen geöffnet, geschlossen und wieder geöffnet. Teilweise aber auch ganz und gar vergessen. Manche Wundermittel sind schon wieder in Vergessenheit geraten bevor sie jemals umgesetzt wurden. Andere Maßnahmen werden gerne als alternativlos dargestellt, auch wenn sie nationale Volksvertreter und Bürger mit astronomisch hohen Beträgen konfrontieren. Da überrascht es nicht, wenn viele Menschen mittlerweile krisenmüde geworden sind und sich in populistisch einfache Aussagen wie „Griechenland rein oder raus“ flüchten.

Um den zunehmenden Populismus in der Euro-Krise zu bekämpfen, ist mehr Aufklärungsarbeit gefragt. In den nächsten Wochen wird innerhalb kürzester Zeit über Rettungsschirme, Griechenland und Staatsanleihenkäufe der EZB entschieden wird. Gleichzeitig kursieren Pläne zur Bankenunion und mehr Integration. Das sind viele Baustellen zur gleichen Zeit. Will man nicht das Kopfschütteln der europäischen Buerger ernten, wird es Zeit zu erklären, wie die verschiedenen Baustellen zueinander passen und wie die Strasse irgendwann mal aussehen soll.

Dieser "Letter from Brussels" erschien in der Euro am Sonntag.