Category Archives: Germany

Global themes

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  • Austerity everywhere keeps domestic demand in check and export channels muted
  • Non govt credit expansion pretty much stone cold dead in the US and Europe
  • Rising oil energy prices subduing global aggregate demand
  • US federal deficit just about enough to muddle through with modest GDP growth
  • Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
  • Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
  • All good for stocks and shareholders, not good for most people trying to work for a living
  • Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

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EUR PMIs-Big GDP Implications

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And not only no change in fiscal policy, but more of same. As the carpenter said about his piece of wood, ‘no matter how much I cut off it’s still too short.’

Fertile ground for the ‘bond tax’ (PSI) for the next round of austerity, to reduce the need to further cut public services and raise domestic taxes.


Karim writes:

As mentioned before, PMI surveys in Europe are the most timely and important economic data point for the ECB; they have the greatest weight in the ECB’s model of estimating current quarter and quarter ahead growth.

Today’s data was weaker across the board, with Germany surprisingly weak in particular.

  • Euro composite PMI fell for the second month in a row, from 49.3 to 48.7
  • Weakness was led by manufacturing, down from 49 to 47.7
  • German manufacturing was especially weak, falling from 50.2 to 48.1
  • French PMI slipped back below 50, from 50.2 to 49

The impact on GDP according to NowCasting (which uses a similar framework as the ECB) was a downward revision to Q2 real GDP growth from +0.6% (annualized) to -0.6% (annualized) for the EuroZone, and from 0.1% (annualized) to -1.2% (annualized) for Germany.

This data should certainly push up the probability of an ECB policy rate cut in May or June.

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Euro zone deficit hawks out in force

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Says it all:

Schaeuble Says Deficit Spending Backers Have ’Learned Nothing’

(Bloomberg) German Finance Minister Wolfgang Schaeuble said that deficit spending is the wrong way to bolster economic growth.

People who believe you can generate growth without pursuing budget consolidation have “learned nothing from the experience of the crisis,” Schaeuble said in a speech in Berlin today.

Germany Turns Up Pressure on ECB

(WSJ) “I hope that the ECB acknowledges its limits and quickly rakes in the money later,” said Volker Kauder, the head of parliamentary group of Ms. Merkel’s conservative alliance of Christian Democrats and its sister party, the Bavarian Christian Social Union, in a Wirtschaftswoche interview on Saturday. Responding to warnings by Brazil about a “tsunami of cheap money” flooding global markets, Ms. Merkel, at the most recent summit of European leaders on March 2, said that she was certain that the ECB had now ended its program of issuing cheap 3-year loans to banks. Merkel also reassured critics that the ECB would not repeat such measures again.

ECB calls for tougher rules on budgets

(FT) The ECB has sharpened its hardline stance on eurozone fiscal policy by urging the still-tougher policing of member states’ public finances. In a report on proposed European Union regulations to monitor budgets better and strengthen the surveillance of countries in difficulties, the ECB makes clear it sees significant scope for further improvement. Among the proposals in the report dated March 7, the ECB suggests the surveillance of countries that run into difficulties in the future should be strengthened by public warnings for the most recalcitrant. Where a country under surveillance is threatening the eurozone’s financial stability, there should be an automatic recommendation that it seeks financial assistance, the ECB says.

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Rest of Europe Shouldn’t Follow Greek Bailout: Dallara

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In regard to the euro zone officials insisting there will be no further haircuts:

‘The lady doth protest too much, me thinks.’

Mr. Dallara and the rest of the euro mob have as yet not come up with any reason any one nation wouldn’t be better off, as evidenced by Greece, with a whopping big tax on bond holders vs the usual tax hikes and spending cuts otherwise demanded.

Rest of Europe Shouldn’t Follow Greek Bailout: Dallara

By Margo D. Beller

Mar 9 (CNBC) — Charles Dallara, who represented bond holders in the Greek debt talks, told CNBC Friday he doesn’t expect other troubled EU countries such as Italy, Portugal and Ireland to need a similar bond swap.

“I would strongly discourage other governments, other peoples of Europe from going this route,” he said, adding the Greek situation “cast a cloud over the entire euro zone.”

None of these other countries “have the same extraordinary high levels of debt and deficits and none of them have quite the same distortions in the economic system. They are on the right path and should maintain the path of reform.”

Greece’s problems were unique, he said, and the resulting financial crisis was “extremely painful for the citizens of Greece” and “prevented the building of confidence” throughout the euro zone.

Dallara, managing director of the U.S.-based Institute of International Finance, was the chief negotiator representing private-sector holders of Greek debt in the largest bond restructuring in history.

He said he was “quite pleased” that 83.5 percent of the bond holders voluntarily accepted losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.

“To see so many bondholders voluntarily deliver their bonds into this exchange is remarkable” and speaks to the desire for Europe and investors to “turn the page” on the whole European sovereign debt problem, he added.

Athens had said it would enforce the deal on all its bondholders, activating collective action clauses on the 177 billion euros worth of bonds regulated under Greek law.

That would potentially trigger payouts on the credit default swaps that some investors held on the bonds, an event which would have unknown consequences for the market.

Dallara said activating the collective action clauses was “one of the unfortunate dimensions” of the debt swap, but stressed it shouldn’t stop foreign investment in European sovereign debt.

“The issue is not just one of legal risk in investing in sovereign debt, it’s better credit analysis,” he said. “You have to understand the underlying credit risks.”

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Sweden Shouldn’t Pay More to Borrow Than Germany, Borg Says

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Anders, you do have their own currency, mate…

Sweden Shouldn’t Pay More to Borrow Than Germany, Borg Says

March 9 (Bloomberg) — Sweden shouldn’t pay more to borrow than Germany because of its strong public finances and low level of debt, Finance Minister Anders Borg said.

“Sweden will probably have a stronger recovery eventually than Germany and then interest rates eventually ought to rise above Germany’s due to, so to speak, economic-cycle reasons,” Borg said in an interview in Stockholm yesterday. “But in the long-term they ought to be on par or slightly below.”

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GEI article is up

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Eurozone: How to Drive an Economy in Reverse

By Warren Mosler

February 27 — The situation in Greece brings me back to the conclusion that merely resolving solvency issues in the Eurozone doesn’t fix the economy. Solvency must not be an issue, but if there is negative growth, solvency math simply doesn’t work for any of the Euro members.

Without growth in the Eurozone the resolution (for now) of the Greek crisis will simply result in the focus moving on to one of the next weaker sisters. As this happens the risk remains that other countries in trouble will ask for haircuts on their debt (similar to Greece) as part of their rescue. And that could trigger a general, global, catastrophic financial meltdown.

Follow up:
Monetary and Fiscal Expansion are Needed

My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.

Alternatively, the ECB could simply guarantee all national government debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.

And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.

Strong Euro First

However, all policies seem to be ‘strong euro’ first. And the ‘success’ of the euro continues to be gauged by its ‘strength’.

The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.

Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.

Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations of euro denominated financial assets, along with all the unspent interest and earnings compounding.

Offsetting all of that unspent income (private savings) is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.

Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than zero, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.

All of this serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.

Three Reverse Thrusters in Use

This works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations – and that continues the negative feedback loop.

Given the demand leakages of the institutional structure, as a point of logic, prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.

And right now it looks like they are still going backwards on all three. And with the transmission in reverse, pressing the accelerator harder only makes you go backwards that much faster.

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More on Greece and the euro

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As previously discussed, all policies seem to be ‘strong euro’ first.

And the ‘success’ of the euro continues to be gauged by its ‘strength’.

The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.

Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.

Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations euro denominated financial assets, along with all the unspent interest and earnings compounding.

Offsetting all of that unspent income is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.

Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than 0, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.

All of which serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.

And all of which works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations that continues the negative feedback loop.

Given the demand leakages of the institutional structure, as a point of logic prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.

And right now it looks like they are still going backwards on all three.

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Greece

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Comes back to the idea that resolving solvency issues in the euro zone doesn’t fix the economy.

And with negative growth the solvency math doesn’t work for any of the euro members.

And what’s with the ECB threatening to back away on liquidity support for the banking system?

So looks to me like the Greek resolution is not the end of the solvency issues, but that the focus simply moves on to the next weaker sister.

And, as previously discussed, the risk remains elevated that if Greece gets to haircut its obligations and gets funding, others will ask for the same, triggering a general, global, catastrophic financial meltdown.

My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.

Alternatively, the ECB could simply guarantee all national govt debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.

And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.

Meanwhile, elsewhere in today’s world news:

The likes of Ford adding to pension funds makes the point of the increasing and ongoing demand leakages putting a damper on GDP.

And oil prices have now crept up enough to materially cut into aggregate demand as well.

Nor are banks adding to capital to meet expanding demand for credit, which remains anemic.

Headlines:

Data Suggests Euro Zone May Slide Back Into Recession
German Manufacturing Slows as New Export Orders Fall
China’s Factory Activity Shrinks for Fourth Month
ECB Preparing to Close Liquidity Floodgates
Ford Pours $3.8 Billion Into Pension Plan
Oil Could Turn to Headwind as Dow Flirts With 13,000
UBS to Issue More Loss-Absorbing Capital
Iran ‘Winning’ on Oil Sanctions: Top Trader
Greek Bailout Puts Focus Back on Credit Default Swaps
Iran Fuels Oil-Price Rally—And Prices Could Keep Rising

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EU Leaders to Agree on Rescue Fund, Balanced Budget

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No let up on the austerity demands, which are now to be legislated via balanced budget rules.

EU Leaders to Agree on Rescue Fund, Balanced Budget

Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.

The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.

Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.

Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.

Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.

The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).

The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

But Germany is opposed to such a step.

Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.

The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.

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France, Germany to Propose New EU Treaty

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They seriously believe that the crisis is all about deficits being too high,
and it all will be and can only be remedied by bringing deficits down.

Therefore they see ECB funding as not solving anything if it doesn’t serve the further purpose of deficit reduction.

Good luck to them, and good luck to us as we’re trying to do the same thing.

:(

France, Germany to Propose New EU Treaty

Published: Monday, 5 Dec 2011 | 10:55 AM ET
By: Reuters with CNBC.com

 
France and Germany have agreed on a series of reforms to address the euro zone sovereign debt crisis that will be presented to EU President Herman Van Rompuy on Wednesday, French President Nicolas Sarkozy said after a meeting with German Chancellor Angela Merkel on Monday.

 
“Things cannot continue as they have done up until today. Our preference is for a treaty among the 27 (EU members), so that nobody feels excluded, but we are open to a treaty among the 17 (euro members), open to any state that wants to join us,” Sarkozy told a press conference following the meeting.

 
“This treaty would contain the following things: We want automatic sanctions in the event of a breach of the rule on deficits below 3 percent (of GDP),” he said.

 
“We want a golden rule that is reinforced and harmonized on the European level so that the budgets of all 17 (euro zone states) have a constitutional rule to ensure that national budgets move toward a return to equilibrium,” Sarkozy added.

 
The French President said the Franco-German agreement would be written up in a letter and presented to (European Council President) Herman Van Rompuy on Wednesday.

 
“We want to make sure that the imbalances which led to the situation in the euro zone today cannot happen again,” he said.

 
Angela Merkel stressed the leaders wanted structural changes which go beyond agreements.

 
“We need binding debt brakes, which can be verified by the European court of Justice … in order for the Stability and Growth Pact to hold,” she said.

 
The Stability and Growth pact lays out the budgetary rules that member states must follow.

 
Berlin and Paris are under unprecedented pressure to see eye to eye in a crisis that has split them on issues such as the role of the European Central Bank in lending to troubled states and on whether the bloc should issue joint euro bonds.

 
“Regarding what we have said about the ECB, nothing has changed. We reject the idea of euro bonds,” Merkel said.

“This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability.”
Top ECB policymakers have been reluctant to buy up debt from distressed euro zone states, as this would take the pressure off governments to get their financial houses in order.

 
But ECB chief Mario Draghi has signaled that a “fiscal compact” produced by the euro zone governments could nudge the bank to act more decisively on the crisis.

 
The hope is that private bondholders will be assured that they are not being singled out by European policymakers for losses, bolstering their confidence in buying euro zone bonds.

 
On Monday, an ECB policymaker described a plan for holders of Greek government debt to take heavy losses had led to a big rise in borrowing costs for other euro zone countries.

 
“It was a terrible mistake,” said ECB Governing Council member Athanasios Orphanides, who is also the Cyprus central bank chief.

 
Cyprus banks are big holders of Greek government debt, the value of which is due to be halved under a new 130 billion euro bailout deal for Athens.

 
In Dublin, Ireland’s government will unveil what it hopes will be the toughest budget of its five-year term, but as it tries to keep the public onside economists are warning that a global downturn means the worst may be yet to come.

 
On Tuesday, the Greek parliament is due to give final approval to a draconian 2012 austerity budget that is a condition for a second bailout package still under negotiation with private creditors, euro zone governments and the IMF.

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