Friday, November 22, 2013

What's happening in Germany?

  • Yesterday, Angela Merkel tried to defend the German trade surplus by saying this (bloomberg):

I think it would be absurd if we were to try make German companies reduce production or cut back on quality.
Well, yes, that would absolutely be absurd, therefore nobody actually demanded anything like that. What on earth is wrong with German politicians, today? "Oh, look over there - a straw man!" "Attack!" But, she also made less silly claims:
It’s also a fairy tale that workers in German export industries are badly paid.
Compared to what? Chinese worker? Well, true... but a better comparison would be German workers ten years ago.
  • Russian threats block Ukraine-EU trade deal (DW) I am not a big fan of the headline. In fact, it is the EU which put massive pressure on the Ukraine: "EU foreign ministers on Monday said Yanukovych had to decide if his country would move toward Europe or Russia" While Russian pressure seems to have been directed at a joint agreement between the EU, Ukraine, and Russia.
  •  Journalist talks with an art collector living in self-imposed poverty. There is a problem with his collection though, partly it is what the Nazis called "entartete Kunst" "degenerate art", which his father was supposed to sell for Hitler; partly it is art stolen from Jewish owners; and only some works were bought by his father legally. here's a longer background story.

Thursday, November 21, 2013

Immigration Up 11 Percent In The First Half Of 2013

As expected, immigration into Germany was up significantly in the first six months of 2013, according to destatis. I have written about this new issue and had this to say:

Germany has changed its tactics. Beggar thy neighbor to solve domestic economic issues is dead. Long live beggar thy neighbor to solve demographic problems. Merkel  herself stated on the issue of labor mobility within the EU(my translation):

We have to be open for young people who come to us, since we already know today that we will have six million less workers by 2025. 
So, is it working?

Krugman, Weidmann And Why It Is Actually Worse

Krugman isn't happy that Weidmann is against further ECB measures without offering any justification. But it is actually worse than Krugman thinks.

What's Happening In Germany?

  • New report lauds East German development (Deutsche Welle): Actually, it highlights that the Eastern states are still not even close to the west 23 years after the re-unification. This is a lesson that the other eurozone members should think about. The Eastern states are still significantly weaker eventhough trillions of euros were transfered there.
  • EADS Works Council Urges Caution on Job Cuts From Defense Revamp (Bloomberg): EADS might cut up to 8,000 jobs. The story is lacking one key fact. The management of some of the military programs like the A400M was, well, not all that good to put it extremely mildly. AN70 for example is not only just half the price, it can also carry a heavier payload over longer distances.  
  •  Euro-Area Factory Production Accelerates as China Cools (Bloomberg): That report could have and probably should have been called: Germany the only country doing OKish in the eurozone. So not really news, but I would like to add a bit of perspective on industrial production in the eurozone :
I think it is time to pronounce the patient dead.

Wednesday, November 20, 2013

... And Justice For All

On Monday the German Bundestag discussed the NSA revelations in a special session. It was the first opportunity for the upcoming "Grand Coalition" of CDUCSU and SPD to show of how "grand" they will be. As expected, the session yielded little to nothing. Well, the Social Democrats have already adapted to their new role of applauding CDU speakers; and the only real criticism came from the Greens and the left wing Die LINKE. But, Merkel talked about "serious" allegations which have to to be cleared up.

Luckily, we have just the right organisation for that called the Bundesanwaltschaft ("Federal Prosecutor's Office"), who are currently looking into the revelations in a so called "preliminary examination phase". One which will lead to an actual investigation ... hmm well, maybe.

European Car Registrations In October

The automotive industry in Europe is rebounding. According to ACEA, the  registrations of new cars in the EU were 4.7 percent higher in October 2013 than a year earlier, reducing the gap to last years' sales over the first 10 months to "only" 3.1 percent (down from 6.6 percent for the first 6 months of the year). But make no mistake this was still the second worst October since 2003; and some of the improvement is due to very high rebates.

Tuesday, November 19, 2013

Lowest Common Denominator

Germany still does not have a new government. The talks between Merkel's CDU/CSU Union and the social democrat SPD are stalling. In fact, the only real agreement seems to be on a a quota for women on corporate boards. But, the discussions about a minimum wage (the SPD wants €8.50);  mothers' pension (for mothers of children born before 1992); or the toll for foreigners on the Autobahn that the CSU wants are going nowhere. This weekend the CSU leader Horst Seehofer hinted at new election as an option. Only two things seem certain: this will be the longest time Germany has ever been without a new government; and the next government will likely be one based on the lowest common denominator.

The Economist Hans-Werner Sinn

Krugman in last Friday's op-ed wrote about the euro crisis and the German reaction to the ECB rate cut. He mentioned the reaction of economists to the decision. One of them was Hans-Werner Sinn:
The influential German economist Hans-Werner Sinn declared that Mr. Draghi was just trying to give Italy access to low-interest loans.

Monday, November 18, 2013

Further Deterioration Of The Spanish Bank Balance Sheets

You might have heard a few days ago, that Spain wanted to exit the ESM program. You might have also heard that the European officials were "fully supportive" of the decision. So all what was missing was the new Banco de Espana data showing that the banks actually did not need another bail out. I have written a few months ago, that the Spanish bank balance sheets were actually in the process of deteriorating in relative terms. Today, the numbers for September were published.

Industry, Real Wages, And Childish Managers

This weekend, the CEOs of several German car manufacturers decided to behave like three year old kids because they really want that chocolate bar low labor costs; and are against a minimum wage of €8.50 and for a huge amount of "temporary" workers. The CEOs of Daimler, VW, Opel and BMW were interviewed by the Bild Zeitung and Daimler CEO Zetsche even threatened Mutti* Merkel that the company would "have to think about a relocation of production".

Let's take a look at some of the firms and the overall situation in the German industry.

Thursday, November 14, 2013

Massive 0.1 Percent Eurozone Growth In Q3

The European Commission pretended a few months ago that the modest second quarter GDP growth in the eurozone (0.3 percent) proved them right. We have learned today that the success story continues - at an even slower pace of 0.1 percent compared to Q2. Germany "lead" the way again with a 0.3 percent (down from 0.7 percent last quarter).

Tuesday, November 12, 2013

Sinn, Unsinn, And The ECB

Paul Krugman wrote that there are huge tensions over the ECB rate cut. German "economists" are criticising the rate cut decision. Well, that is true, but for the most part it's just stuff we've heard a hundred thousand times before.

For example, Michael Hüther head of the IW institute said that the policy is both not working in program countries (which is true) and damaging the North (which is wrong) at the same time, because ... poor savers. He claimed that the rate should be "around 3.0 percent to 3.5 percent" for Germany, which is completely laughable if one actually looks at inflation which just "reached" a new low three year low of 1.2 percent in Germany, in Oktober. But hey, the ECB could also look after German savers instead of doing its actual job of keeping inflation close to but below 2.0 percent.

Monday, November 11, 2013

Reforming The Renewable Energy Law... Again

We still don't have a coalition contract for the next government, but today we learned more about the plan to reform the Renewable Energy Law. Merkel has realized that offshore wind energy is quite expensive after, well, Merkel massively increased (from under 9 €ct/kWh to around 15 €ct/kWh - depending on location - for 12 years plus 8 more at a lower level) the subsidies in the form of an allocation fee paid by consumers in 2009.  This new "reform" will not lead to any significant improvements to the consumers.

Wednesday, November 6, 2013

More Surveillance In Germany?

Snowden's revelations have shown the world that the US and British governments cannot be trusted. Additionally, it is very likely that many if not all allied intelligence services aided the NSA and GCHQ; and also used similar methods though likely on a smaller scale, which is probably much more of a funding issue than anything else. Some believed that there would be a change in thinking now. The current coalition talks in Germany show that this is the case, sadly in a very different direction than many expected.

Thursday, October 31, 2013

Hate To Say I Told You So

Well, that did not take long. The answers to the US criticism on the German export dependence are in and they are exactly the ones which could have been expected.

Using The Right Words When Criticising German Export Dependency

This weak both the European Commission and the US Treasury Department have criticised the German export dependency. The "Report to Congress on International Economic and Exchange Rate Policies" uses untypically clear language:

Wednesday, October 30, 2013

Commission Slowly Realizing That The Commission Failed Miserably?

When one sees a question in the heading, the answer is often: "No!" Just look at the Fox Nation homepage which often asks questions, that have little to nothing to do with the article below. But in this case the answer seems to be: "Well, kinda..."

Quotas For Women On Company Boards

Merkel's conservative CDU/CSU Union and the social democrat SPD are still working towards a coalition contract. According to Sueddeutsche, they have come closer to a agreement on quotas for women for supervisory (Aufsichtsrat) and management boards (Vorstand) of the largest German companies.

Good Policy vs Policy of Good Numbers

Two press releases one year apart covering the same subject and exactly the same time. People are at risk of poverty, if they earn less than 60 percent of the median income. Severe material deprivation is a sign of social exclusion and not poverty at least in the eyes of the EU. Those three million that disappeared are probably all millionaires, who work little and don't want to spent any of their money aka self-inflicted severe material deprivation. Without further comment:

Press release 2012-10-23

About one in five people (19.9%) in Germany – some 16 millionwere affected by poverty or social exclusion in 2011 (2010: 19.7%).[..]According to the definition of the European Union (EU), there is poverty or social exclusion when one or more of the following three criteria are met by the households covered: risk of poverty, severe material deprivation, household with low work intensity.

Press release 2013-10-25

Almost one out of every six people was at risk of poverty in Germany in 2011 – that is 16.1% of the population or approximately 13 million people. The Federal Statistical Office (Destatis) also reports that their share was up somewhat on 2010 (15.8%). 

Monday, October 28, 2013

President Obama Has Damaged US Foreign Relations Even More Than Republicans Ever Could

President Obama received a lot of premature praise, especially in Europe, where almost everybody was happy that Bush's successor was a democrat. He made many promises, none of those that Europeans were looking forward to were kept. And now this weekend we saw conflicting reports about Obama's knowledge of the spy programs. Bild claimed the US president learned about eavesdropping on Merkel in 2010, while Spiegel reported that he was informed this Summer.

Republicans Are Damaging US Foreign Relations

It is not just economic damage that Republicans are causing. Their unbelievable arrogance combined with childish ignorance made Republicans say really stupid things on US television this weekend. On "Meet The Press" Representative Peter King not only made up stories about thousands of lives saved by NSA spying, he also felt the need to pretend that eavesdropping on Merkel was somehow excusable because some of the 9/11 terrorists had lived in Germany.

Thursday, October 24, 2013

Satire Lags Behind Reality

(via)Once in a while newspapers get fooled by satire because it the premise of an article feels real, and the journalists do not take the time to fact check the story, and onion style stories can end up on in the news cycle. Yesterday the opposite happened. The Postillon, a German award-winning daily political satire homepage, wrote on the issue of more and more people being dependent on basic security at old age that one could increase the bottle deposit as a "social measure" supporting those collecting bottles. A premise which feels unreal, but is close enough to the position of German politicians that it will make an excellent satirical article. Well, sadly reality was faster.

Wednesday, October 23, 2013

NSA, Merkel's Phone, And Hypocrisy

According to Spiegel, Angela Merkel's private phone "might have been tapped" "for years" by US intelligence. Of course, the Bundesregierung "unequivocally disapproves". When the revelations were still about the German citizens her Minister of the Interior Friedrich called the critics "anti-American", and "naive".

Monday, October 21, 2013

EU "Shutdown"

Now that the US shutdown is over, it seems to be time to create our own little budget crisis in Europe. The EU Commission, the European Parliament, and the Council of the European Union (member states) agreed on a budget for 2013 in 2012 under the assumption that all payments due for 2012 would be paid 2012, which just did not happen. Additionally, the member states decided to start reducing the budget, which lead to a budget which was €2.9 billion below the 2012 one. So the 2013 budget needed amending, and since currently everybody in Europe is a big fan of paying in tranches, it was decided to use several installments for the needed sum of €14 billion. Everything went fine with the first and largest one, but now we seem to have a problem.

Friday, October 18, 2013

Demographic Change, Reforms, and the Commission

Olli Rehn recently reiterated his sustainable growth for Europe story. I have shown that Greece has lost more than "just" a decade and talked about how the the secondary effects are now coming back to haunt us, among other things. Let's today address something else. Almost two months ago Mr. Rehn said at the European Forum in Alpbach:

This is not just to combat the current crisis! In the coming decade, a major drag on growth will be the decline in the working-age population in Europr[sic]. Reforms are important not only to overcome the current crisis but also to address the long-term demographic change.
 (emphasis added)
It's fascinating how this person can easily switch from very short term - look at this one not completely awful quarter: it proves that we are doing everything right, never mind the disaster we have caused since 2010 - to long term demographics. I strongly believe that anything Mr: Rehn says has to be taken with a lethal dose of salt. Here's why that is also very true for the demographic situation.

Thursday, October 17, 2013

Minimum Wage In Germany

Coalition negotiations between Merkel's CDU/CSU Union and the SPD will begin shortly. One of the major issues was the minimum wage of €8.50 per hour, that the SPD wants. Many German economists fear that jobs will be lost. They are right that this might be the case in the short term but in the long run they are absolutely wrong.

Wednesday, October 16, 2013

Automotive Industry In Europe - The Light At The End Of The Tunnel

The automotive industry in Europe was hit hard by the Great Recession. The car sales fell in every year from 2008 until 2012. The whole market shrank by 22.4 percent compared to 2007. The first half of 2013 did also not look good as registrations fell by 6.6 percent. Today, ACEA published the car registrations for September, and the situation seems to have improved significantly.

What's Happening In German Politics

First up, Germany doesn't have a new Government yet, but the Greens will not be Merkel's next coalition partner. This isn't really news, a so called grand coalition with the SPD (new labor) was much more likely from the start.

Second, Merkel prevented a new EU compromise on car emissions. She wants higher Super Credits for environmental friendly cars, which basically just means counting these vehicles more than once when calculating the average fuel consumption of the whole automotive manufacturer's fleet. I have written  about super credits (counting electrical cars more than once against the CO2 emissions of the whole fleet) before; and described why I think they are important:

Super credits have the potential to increase the production capacity of zero emission vehicles, and also give companies an incentive to accept lower profit margins on these, therefore Merkel was right to stop the current proposal.
 So, again I completely agree with Merkel to stop an idiotic regulation based on fantasy assumptions of how much development potential is left concerning conventional engines. Also, we in the current form the regulation favors plug-in hybrids. Plug-in hybrid only produce less CO2 if one ignores the fact that more needs to be used in the production for the second engine and that the current German electricity comes in large parts from coal and lignite.

Still, CO2 regulation has become important for another reason. The CDU's biggest donor is the Quant family. The BMW shareholders gave €690,000 to Merkel's party this week. Of course, one would have to be an idiot to think that the Germany's biggest party can be bought with €690.000, still the timing is absolutely mind boggling.

Instead of a discussion about the size of super credits (should electrical vehicles be counted twice or thrice against the rest of the car fleet, for example), we now have a discussion about corruption. Super credits make sense since the buyers of large cars will cross finance zero-emission vehicles and thereby make them cheaper, but I have not seen a single article in the German media talking about this fact.

Other than that nothing will be happening until the coalition contract is written, which might take a while. Also there is a very small chance that we wont see a grand coalition in the end which would mean that there would be new elections, but that is extremely unlikely.

Tuesday, October 15, 2013

Economics Isn't Science - "Economics Is Harder Than Physics" Edition

So, while Higgs and Englert got the Nobel prize in physics after the biggest machine we have ever built had produced conclusive evidence that proved them right, the "Nobel prize" in economics went to both Shiller and Fama and additionally Hansen, one of whom has been conclusively proven wrong by the biggest disaster of our time. (Yves Smith posted an excerpt of her book concerning Fama which I completely agree with)

Reading what people had to say about two contradicting ideas) both getting the same price at the same time, I came across this gem, by Justin Fox. It started out great, but seemed to completely collapse in the second paragraph.

He claimed:

This is, to a certain extent, further evidence that economics isn’t a science like physics is a science [..]. But that’s not because economists are all frauds — it’s at least partly because economics is harder than physics.
Wait what? I completely agree with the first part, but the second part is, well, interesting. I would have at least expected some kind of explanation, but non is given. The rest of the post is actually a good read, but that is a pretty big claim. Let me try to explain why economics is in some respects harder than physics and why some economists are still frauds (but often not intentionally).

Monday, October 14, 2013

On Productivity, Diversification And Engineering - Or Why Engineering Jobs Might Be Endangered By Machines

Many economists seem to believe that productivity increases come from the automation of jobs "in the middle", which has led to both a higher demand for low and high skilled labor. For example, David H. Autor and David Dorn recently wrote an article in the NYT, which is based on that believe. They argue that people performing "abstract tasks that require problem-solving, intuition, persuasion and creativity", working in professions like "law, medicine, science, engineering, advertising and design" "benefit from computers". Let me focus on engineering and design and show that these assumptions do not show the whole picture. Also, I will focus on only one industry: automotive

Helper In The Introduction Of The Euro Now Member Of Euro Sceptic Party

The Spiegel (German) has an interesting article on Wolfgang Glomb, who for years headed the department "European Monetary Union" in the German Finance Ministry. Today, he is a member of the euro sceptic AfD.

Sunday, October 13, 2013

European Growth Strategy - Staying The Course for Disaster

A few days ago some EU officials together wrote an op-ed in the WSJ claiming that "Europe's Crisis Response Is Showing Results, well of course it is; but those results just aren't good (via). In this article they had to say the following on growth:

The euro zone's economic prospects have improved over recent months. Modest GDP growth returned in the second quarter of the year. Industrial orders and output have increased, and many countries' sovereign-bond yields have decreased. Unemployment, while still much too high, appears to be stabilizing. Further modest growth is forecast for the second half of this year, and the recovery should pick up speed next year as long as we stay the course.

Saturday, October 12, 2013

Savings Banks' Head Georg Fahrenschon Says Something About Low Interest Rates

Don't like the headline? Well, i don't like Mr. Fahrenschon's supposed insight. He was a CSU politician and Bavarian finance finance minister during 2007-2011; and therefore possibly one of the responsible parties in the BayernLB and the related Hypo Group Alpe Adria disaster, which has cost billions both for Bavaria and the savings banks he is now leading.

How The German Industry Is Damaging Itself

Bertelsmann Stiftung is pushing for a smaller state and and more economic "freedom" to fire people. I can understand their current support for a free trade agreement with the US, since content providers will profit the most; and the Bertelsmann Group is Germany biggest content provider. Their fight against against worker rights also makes sense since Bertelsmann is not dependent on good workers, they are only the middle man. Also, a minimum wage would mean that it would be harder for the middle man industry to exploit workers. But for inexplicable reasons, the German industry wants the government to go in the same direction. These are firms dependent on good engineers, proficient craftsmen, and actually have a very good track record working with unions.The metal and electronics industry employers' federation has their own lobbying institution - the Initiative Neue Soziale Marktwirtschaft (INSM) - which aims at "reforming" Germany to become more like the US. In other words the INSM is trying to turn Germany into an industry free zone, like Britain; and sadly it is very much successful.

Friday, October 11, 2013

Economic Arguments on Airstrip One

Airstrip One, formerly known as United Kingdom, is headed towards political and economical irrelevance. British industrial products are for the most part nothing but the bread crumbs left over by important countries like the US, Germany, and India. All that seems to be left is the banking sector. Still economists and government officials argue as if the Island and a third still had some relevance. As if it mattered if they went for austerity or not. The small state doctrine has turned Britain into what it is today Still conservative journalists live in some kind of fantasy empire, and tend to blame immigrants (Jeremy Warner, Telegraph) for bad productivity performance. But there are only a few industrial bright spots left; and those are in part not even British anymore.

Thursday, October 10, 2013

United In Hunger

The leaders of the European non-union gave talks and wrote articles - after a single quarter of growth - to pretend that their completely failed austerity experiment was somehow a success. Schäuble and Barroso are clearly the main offenders; and Draghi, yesterday felt the need to join the chorus.

Draghi said yesterday at Harvard University:

Many commentators on this side of the Atlantic looked at the euro area and were convinced it would fail. They mistook the euro for fixed exchange-rate regime, when in fact it is an irreversible single currency. It is irreversible because it is born out of the commitment of European nations to closer integration.
Well, there's everything wrong with that. Merkel is not a fan of closer integration, she wants competences to be moved back to the executive of the countries. She is not alone in her fight against the EU institutions. Britain and the Netherlands also want less EU. Merkel will win this fight without question; the Commission is already retreating before it even has begun. The only reason why the euro hasn't failed yet is that the peoples suffer in silence. Nothing good has come out of austerity; and the troika brought mass unemployment to the program countries and damaged the social safety-net everywhere they could.

Not only that, the austerity which the fools claimed would increase investment has also damaged the production industry all over Europe. The worst part of course is the suffering they purposefully inflicted on the poor. Today the Red Cross gave their own assessment of the humanitarian aspect. IFRC Secretary General Bekele Geleta said:
Europe is facing its worst humanitarian crisis in six decades.
This is how good our leadership really is. Nobody has been able to cause more harm to Europe with the exception of Hitler. Not only that this is not a short term problem anymore. The damage they have done will be with us for decades, according to the Red Cross (pdf):

The long term consequences of this crisis have yet to surface. This report shows that the problems caused will be felt for decades even if the economy turns for the better in the near future.
Sadly, they are correct. The Red Cross are the ones who with these two sentences show more economic competence than all of the IMF, ECB and EC combined.

Even if Greece, for example, grew at an annual rate of 5 percent then the country would be back to where it was in 2007 by 2018. A more realistic 3.5 percent growth scenario would mean that Greece wouldn't make it back to 2007 levels before the next decade. 

So just how bad is the humanitarian situation in Europe, according to the Red Cross? 

  • The number of European Red Cross organisations giving out food aid has increased from 18 to 22 from 2009 to 2012.
  • Overall food aid had to be increased by 75 percent during that time.
  •  In Spain the food aid distributions went up 133 percent
  • More than half of the Greek unemployed no longer have health insurance. (just a reminder over 27 percent are unemployed)
  • Suicide rates in Greece have gone up 40 percent from 2010 to 2011
So, no it is not just some economic numbers that look bad. The Troika has brought suffering to the program countries with no upside. Austerity even as expected failed to get the debt under control, caused economic and social pain without gain; but all this does not matter to the defenders of austerity, since we have seen a single quarter of growth.

Yes the euro has not failed yet, but that is not due to good work by the parties involved or a will to come closer together. The countries are scared to be the first to leave. It is very similar to using the nuclear option. Nobody wants use it but in the end somebody will and the house of cards will fall. Europe hasn't been as divided as it is now since Adenauer and de Gaulle became friends. The people who live under this third-worldification regime are the ones that have really allowed the euro to survive; perhaps now it is time to stop stepping on them and actually switch to a policy which makes Europe better and helps the people and not a small minority of bankers.

Life Expectancy And Income

Everybody should be well aware that in the US the wealthy have a higher life expectancy than the poor. Many might be under the impression that this might be due to the poor not being able to get good medical treatment in the US. But in Germany we are seeing a very similar picture. Yes, private insurance might play some role, but the public health insurance in Germany is actually very good.

The Max-Planck-Institute (German pdf) for demographic research, showed that the life expectancy of 65 year old males who expect high pensions is in West-Germany 4.8 years higher than that of of those who get very low pensions, but still worked for their whole life. In the new Bundesländer (states) they will live 5.6 more years.

In the middle 1990ies the difference wasn't as high as it is today. The wealthy could everywhere in Germany expect to live around 3.5 years longer than those with low pensions. Women, foreigners, self-employed and state employees are not included in the study. Also only those who who worked for most of their life were included.

In Germany the so called "left wing" SPD and Merkel's CDU decided in 2007 to increase the eligibility age stepwise from 65 to 67. The reasoning at the time was that a) people live longer than in the past and b) the demographic situation made it necessary. But while it is true that wealthy people do see a steady increase in life expectancy, this is not true to the same extent for poor workers. Even worse: it is easily possible to stare at a screen until one is 67, but very much unlikely that the same is true for somebody who is for example a roofer.

This so called reform was not only nothing more than an euphemism for cuts, it also redistributes wealth from the poor to the rich. It's how the German new labor rolls, I guess.

Monday, October 7, 2013

Unions vs Companies in Germany vs US

Today two very interesting stories about unions appeared in the newspapers, an US and a German firm and two very different approaches to worker representation. VW is is negotiating with the United Automobile Workers union (UAW) about representing workers at their US plant in Tennessee; and in Germany Amazon is fighting against Verdi (German union).

Saturday, October 5, 2013

Free Trade Propaganda?

The  Bertelsmann Stiftung(Foundation) published a study today claiming that a Transatlantic Free Trade Area would increase employment by 160.000 in Germany. Together with the Munich based IFO Institute they proved that in economics there is only extremely limited knowledge of how companies operate; and how different standards in the EU and the US affect engineering. Additionally, I don't think I value life the same way they do.

Monday, September 30, 2013

Short Note: Switzerland Conducting Military Maneuver in Which the French Attack

All militaries undertake maneuvers. Typically, they want to train for a realistic scenario. In Germany it was "Red Land" attacks "Blue Land" in the past; and Germany being part of the latter was the first line of defence.

Switzerland, which has no enemies felt it had to get a bit more creative, according to Tages Anzeiger. Their scenario was that France breaks up due to the crisis in the eurozone. One of the new states thinks that Switzerland is responsible for their woes, so they try to acheive debt forgiveness by conducting terrorist attacks. [The simulated French "plan" sounds a bit mad, but so is shutting down a government to try to reach an unachievable goal, or breaking up a coalition to blackmail the president into giving amnesty to Berlusconi. Mad but not unrealistic, I'd say.]

A Swiss tank brigade had to fight off that enemy. Of course, France isn't happy with that scenario. Also, this isn't the first time that Switzerland has trained for a eurozone breakup. Last year, in a similar scenario the country simulated the army having to keep refugees out of Switzerland.

In my opinion, a euro breakup is the only realistic scenario in which Swiss troops would have to fight, since the country is strictly neutral and the army is used almost exclusively for defensive purposes, though they did participate in the KFOR mission in Kosovo. So, I don't understand the French criticism that Switzerland should rather train for "threats of the 21st century." They would have been right three years ago, but the utter incompetence of the leadership in the eurozone has turned such scenarios into possible "threats of the 21st century".

Bundesliga Matchday 7 Roundup

Roundup below the fold

Sunday, September 29, 2013

Siemens to cut 15,000 jobs

Siemens, the Munich based engineering and technology firm, is in the process of cutting 15,000 jobs worldwide 5,000 of these in Germany. The companies industrial sector with the fields automation, propulsion, and services is the most affected in Germany, according to a spokesperson.

First major victory for ICSIF

The International Conspiracy To Sap And Impurify Our Precious Bodily Fluids (ICSIF) has achieved its first major victory. (I wonder why almost nobody read that post) Italy probably does not have a government able to do its job anymore, now that Berlusconi has withdrawn his ministers from their post. Prime minister Letta will try to find a solution next week, but it seems unlikely that anything but new elections are possible. 

Beppe Grillo could be quite happy that the "establishment" is just as incompetent and unpatriotic as he always claimed.  His five star movement, which looked like it was getting weaker, will now be stronger than ever. He rightly wrote that "what has died is democracy" in his recounting of the events that led to this government, which was bound to fail from the beginning. 

How are the other fronts that ICSIF is fighting on looking?

  • Nothing new on the western front: the republicans will most likely force a shutdown of the US government. Stan Collender sees a 90 percent chance that it will happen.
  • Greece banned a protest march by special forces reservists, who seemed to be calling for a revolution. They are also arresting members of the neo-Fascist Golden Dawn party
  • In Germany the euro and Europe play absolutely no role at the moment. The after election talks are about if Germany should increase the top tax rate or not. All parties seem to think that we are some kind of island that cannot be affected by the chaos that we caused and which surrounds us. 
 Oktober will be a very interesting month. It is quite understandable that Greek citizens are extremely disenchanted by the German election result. Germans have likely voted for four more years of destruction in Greece.The ICSIF might just win if Greece becomes less stable and the German Constitutional Court decides that the Bundesbank cannot participate in the ECB's OMT program.

German Tea Party

I have written, that the CSU (sister party of Merkel's CDU - together they form a Union in the Bundestag) is completely void of any economic knowledge. Just in case somebody thinks that that was a hyperbole. I give you CSU party leader Horst Seehofer:

For possible talks about the forming of a coalition with the SPD or the Green there can only be one basis: the party program of CDU and CSU. In there you will find nothing about either tax increases or higher debt - quite the opposite! The foregoing of higher taxes and higher debt is a brand essence of the Union.

I think that for him higher taxes and higher debt are more than random phrases he knows little about, other than that both are bad. So, for him it makes sense to put them into a sentence. Of course, higher taxes would mean higher revenue and therefore lower debt, but Seehofer doesn't care.

Fun fact: he also ruled out a coalition with the Greens just a few days ago. He doesn't seem to do that anymore. 

Friday, September 27, 2013

Germany As Currency Manipulator

Paul Krugman today wrote about Germany as a currency manipulator.

"The general point is that if we imagine a euro breakup, I think everyone would agree that the new mark would soar in value, making German manufacturing much less competitive.
Well, I guess I am not everyone. A euro break up would wipe out most of the banking sector in Germany, so no I don't think that the new mark would soar at all. But the general point that Krugman seems to be making is that the euro is weak, much weaker than the mark would have been if the euro had never happened. But, I also disagree on that point.

  • Compared to the yen, the euro is today 33 percent stronger than it was one year ago.
  • Dollar 5 percent stronger
  • Pound sterling 5.8 percent stronger
  • Rouble 9.6 percent stronger
The euro is now relatively strong compared to other currencies. The German trade balance is below what it was in 2008. Non domestic new orders have been pretty much unchanged for two years now.

Add in inflation and the German trade surplus is actually becoming smaller. I think the picture we are seeing is that the euro is pretty close to the level that the Deutsche mark would be. Is this good or even acceptable? Hell no! This is an absolute disaster for all other eurozone countries. Germany needs higher inflation, much higher inflation. It is a pretty strange situation in Germany wages need to be higher and at the same time the ECB should try to weaken the euro to get all other countries more competitive.. But, the German media starts crying Weimar if we even get close to two percent. 

One more thing. Krugman shows a graphic of Target2 to support his point. But the German Target2 net position has been falling, without affecting the trade balance at all, since the announcement of the ECB OMT program in 2012.

So, yes Germany is a currency manipulator. It is keeping the euro stronger than it should be. Either Germany starts accepting high inflation, or it should leave the euro.

Thursday, September 26, 2013

International Conspiracy To Sap And Impurify Our Precious Bodily Fluids.

I mentioned several reasons yesterday, why it is possible that the new German government might have to fight a battle for the euro they cannot win. I included the Republicans and their most likely successful attempt to damage the reputation of the US. But we are seeing struggles against sanity for the purity of our bodily fluids elsewhere, too.

Merkel and Europe

Will Germany change course on austerity after the elections? The German news media is divided on the issue. But, Merkel's next coalition partner will either be the social democrat SPD or the Greens, both want a less austerity and both want eurobonds.

Monday, September 23, 2013

The Past Coalition Partners Of Merkel - Or Why It Seems Possible That Merkel Will Not Be Chancellor For The Whole Term

Merkel will clearly be the next chancellor of Germany. But the fate of the two former coalition parties the social democrat SPD and the liberal FDP should be a lesson for her next partner.

Election - Afterthoughts - Four More Years?

As expected Merkel will lead the next Bundesregierung (federal government). What came as quite a surprise is that she almost could have done it without a coalition partner, since neither the liberal FDP (her former coalition partner) nor the AfD, the euro-sceptical party, managed to jump the 5 percent hurdle to get into Bundestag, which reduced the percentage needed to get the absolute majority in the next Bundestag to around 42 percent. Merkel's CDU/CSU Union got 41.5 percent. An improvement of 7.7 percent over the result of 2009. A excellent result for the party, but overall the next Bundestag is definitely not what Merkel wanted.


Which coalition can be expected and what might happen in the next four years?

Friday, September 20, 2013

German Elections On Sunday Will Be A Very Close Call

On Sunday German citizens will decide who will govern the country for the next four years. The final polls are in and it looks possible that the current coalition of CDU/CSU and FDP will come to an end. The federal elections have become a very close race on the last few meters. So which are the possible coalitions and which parties will be in the next Bundestag?

Wednesday, September 18, 2013

Realpolitik in Syria And The Appeal To Incompetence

We know that Sarin was used (by whoever) to murder a high number (1400) of civilians. What we did not know until today is: who was the idiot who provided Assad with the chemicals needed to produce the nerve agent. Today we learned that last decade we - ze Germans - did not care as much about the lives endangered by the gas. So we exported 90,000 kg HF to the dictator. Hydrogen fluoride (HF) is essential in the production of Sarin. But fear not Merkel has stated that she has no evidence that it was our HF which was used to produce the gas.

This seems to be our newest general-purpose-government-self-defense. They say they don't know a thing therefore they are also not responsible for anything. It was used to great effect during the NSA scandal. It is a completely new propaganda technique. We shall call it appeal to incompetence. We have no knowledge that [enter random argument]:

  • Assad used a chemical needed for the production of Sarin in the production of Sarin.
  • The NSA spied on German citizens
Excellent. Merkel will get more than 40 % of the vote on Sunday, which shows just how well the appeal to incompetence works as a tactic.

The chemicals were exported during the time of both the first Merkel government and Schröder's red-green coalition (2002-2006). When it comes to exports in Germany it has always been: Erst kommt das Fressen; dann kommt die Moral (First comes the eating then come morals). Today it is Erst kommt das Fressen, then comes a claim that they don't know anything. No more morals. Realpolitik über alles.

Economics vs Engineering

I like reading Noah Smith's blog. But on Wednesday, he tried to compare economics to engineering. He wrote:

Just as some engineers study computers and others study nuclear reactors, some economists study taxes, other study financial markets, and still others study how psychological biases should change the design of policy. So to use the chaos in financial markets as a reason to discredit all of economics is analogous to discrediting all of engineering on the count of a Fukushima disaster.
There were two major nuclear catastrophes to choose from. He picked the wrong one. Not only that, engineering in general is nothing like economics at all. Let me try to explain:

Tuesday, September 17, 2013

So Schäuble Has Made A Fool Of Himself...

Schäuble just couldn't keep quiet after one single quarter of growth in the eurozone. He had to claim that:

What is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted.
No it isn't. Quite the opposite is true. It cannot be repeated enough. The country which saw the highest growth rate was Portugal. Portugal's Constitutional Court, ruled may of the austerity measures unconstitutional, and once the self defeating austerity was gone the country recovered at a pace of 1.1 percent in a single quarter. The other southern countries are still contracting.
Ambrose Evans-Pritchard wrote an excellent article explaining pretty well why Schäuble's claim is complete bogus. 

Just a few nitpicks:
  • The German Constitutional Court is in now way in the pocket of Schäuble. The laws that Merkel's government creates get mowed down faster than they can make their unconstitutional stuff they call laws up. In fact even the German voting law was unconstitutional and they barely managed to make a new one in time for the election on Sunday.
  • Schröder's "reforms" "achieved" a lot of things e.g: they created a gigantic low wage sector, in which the work is subsidised by the government so people can make ends meet. More than every fifth worker is in that sector (meaning they get payed less than 9 euros an hour). Germany does not have a minimum wage, which has lead to some - let's call them - creatively low wages. The country now has two labor markets, one with secure jobs and one to exploit everybody else. Two are always better than one. Pension reform has made many in finance obscenely rich; and the best part is the money one is "saving" isn't yours anymore (in the so called Riester pension); it cannot be inherited, once a single payment to the pensioner is made. It created a strong leech industry with negative productivity, since those people are nothing but a tax on anybody that now is trying to save up for retirement. 
  • He should have emphasised more that even if austerity had been a success, then the depreciation of the currencies of Brasil, Russia, and India in the last month completely negated any competitiveness improvements in the South. Three years of chaos and destruction and it all went down the drain in a single month. Germany now has trouble exporting since Abenomics is doing exactly what it was supposed to. This might very well be the finishing blow for the euro.

Monday, September 16, 2013

Mommy, The Mean Kids Are All Throwing Curveballs Again

So, the UN presented their findings on the use of chemical weapons in Syria. They did not provide any new insight on who fired those weapons still, the USA, Aistrip One formerly known as "Great" Britain, and France have all come out and out of thin air claimed that this is the case.

Bundesliga Matchday 5 Roundup

 Matchday 5 roundup below the fold.

Bavaria Deep Black Again

Bavaria held state and regional elections this Sunday, one week before the Bundestagswahl (federal elections). The CSU (party color: black) - the Bavarian only part of Merkel's CDU/CSU Union - recaptured the absolute majority. Five years ago, the CSU was forced to form a coalition with the liberal democrats, who captured 8 percent of the vote.

What can we learn from this result for the federal elections next week?

Thursday, September 12, 2013

Football, Violence and the Police

A debate about violence in football stadiums in Germany has been going on for some time, now. An police report stated that the number of people injured had increased significantly. At the same time a media campaign was launched to get rid of pyrotechnics at games. This included the burning clothes live on TV to illustrate the dangers, but to my knowledge no person that was actually injured by a flare in a stadium could be found. Then, few weeks ago, during the Champions League qualification game between Schalke 04 and PAOK, a police action against Schalke fans sparked an outcry, and now has escalated even further.

German Economists Against ECB Bond Buying on the Secondary Market

The Bundesverfassungsgericht (German Federal Constitutional Court) will rule within a month if and up to what scope the Bundesbank is allowed to participating in secondary market bond buying schemes like OMT. 136 German economics professors signed a plea letter claiming that these are against the law. Specifically, they mention Article 123 of the Lisbon Treaty which prohibits direct bond purchases by the ECB. So, buying bonds on the secondary market is allowed. The economists therefore had to undertake significant intellectual gymnastics to also pretend that these are illegal, too. It was an answer to a similar open letter by for the most part foreign economists.

Wednesday, September 11, 2013

State of the Union

Barroso held a "State of the Union" address today. If it weren't so sad one could be inclined to call it an excellent comedic performance, something an actor of SNL would say to make fun of the European Union.

Seriously, I do not want to live in this "Union" anymore. He started out by blaming the US for the unemployment crisis in Europe. It should be absolutely clear to anybody that unemployment started to get completely out of hand after our genius "leaders" came up with a plan to "restore confidence" through austerity. Countries like Iceland and Turkey are performing better than anybody who received "help" from the euro austeritians.
It is downhill from there:

Secundary Effects of Austerity are Coming Back to Haunt Us

The consensus of the austeritians about what was ailing the eurozone was the lack of competitiveness. More precisely, productivity did not increase in line with the wages in the crisis countries, therefore they became less competitive, which led to a negative trade balance. The only cure they saw was imposing harsh austerity on these countries, which resulted not in increasing competitiveness; but caused mass unemployment and outright destroyed industries. Of course, the imports completely collapsed in the program countries, which lead to fast "improvements" of the trade balance. But the policy has not only failed completely in the eurozone, since we are still not back to the level of 2008 and will not be until 2015, no it now also becomes quite clear that the secondary effects on especially Asian countries might even endanger the minimal signs of hope we have seen in the second quarter of 2013.

Monday, September 9, 2013

Economics is not Science - ECB Working Paper Edition

There is a ongoing discussion if economics should be considered science. I personally think that not being able to test any policy in a controlled environment without external influences keeps it from being and possibly ever becoming science. This brings me to a recent ECB working paper by Nickel and Tudyka titeld "Fiscal Stimulus in Times of High Debt"(pdf).
They argue that an increase of 1 percent in government consumption at a high debt to GDP ratio might cause a complete collapse in private investment, GDP, and significantly improves the trade balance a few years later; aka massive austerity.  Sorry, I am not buying that at all. Here is why:

Friday, September 6, 2013

Who Cares About Central Bank Independence?

In Germany politicians often talk about central bank independence, they profess that it is absolutely necessary in modern economics. But is that really true? A few examples:

Monday, August 26, 2013

A German Tale - How Not Reforming Stabilised Public Debt

The German chancellor Merkel likes to call the austerity policy in southern Europe "necessary and in part painful reforms". She claims that the policies are "without any alternative". Merkel has had big plans for reforms in Germany itself after the last election, but non of those became law. Still the country has achieved a budget surplus in the first half of 2013.

Thursday, August 22, 2013

Output Gap

I was watching a discussion (German) between Berndt Lucke of the euro sceptical AfD with some CDU person, who kept asking how much Lucke's plan will cost. Lucke at least has a plan. I don't like it, but his party is the only one which actually has one. So, I asked myself just how much has the incompetence of our leadership cost us already, through policies which kept GDP growth below potential.

Success in Greece

Some might still believe, that Germany will be willing to do what it takes to solve the crisis in the eurozone. I do not think that is or will be the case. Merkel said in an interview with SAT.1, yesterday, that her approach - "to only help if the country is willing to reform" - has been proven correct; "and there is no argument about it anymore."

Wednesday, August 21, 2013

A few interesting stories

Jeff Jarvis compares the reporting of British and US media outlets with that of German ones on the eavesdropping scandal and the destruction of hard drives at the Guardian. One caveat: the demonstrations were rather small in Germany. Google streetview caused a much bigger uproar. This might have to do with vacations, but since it also does not seem to make any difference in polls it does not - at this moment - seem like a story the public really cares about. (English) via
Der Spiegel's take on the above story. (English)
Deutsche Welle on the prescription data scandal in Germany. Prescription data is being sold but it is not properly anonymised, making it easy to identify the patient. (English)
Deutsche Welle discussing some problems the German Bundeswehr is encountering in its attempt to move away from a conscription army concept to a professional army. (English) My take: there is no way back. In the last years of the draft it had become blatantly unconstitutional. It was a lottery scheme. Most of my male friends, the same age weren't drafted, so, they needed to reform the military service to avoid a ruling by the Federal Constitutional Court.

A few google translate links:

SZ talks about the truth about additional aid for Greece coming out in slices.
Zeit has a good article on the immigration to Germany from Romania and Bulgaria, which are among the poorest EU countries.
Wolfgang Münchau on the party program of the Greens. He says that the Greens are the only party which was able to make an apt analysis of the causes of the eurozone problems. I looked at the CDU "Government Program" earlier month. It was an absolutely horrible read. They want a lot of thing; and that is it.

Electoral Campaign

Next month, Germany will elect a new Bundestag. I have written an article on possible coalitions a few weeks ago (click). Today let's look at what is happening in the electoral campaigns.

Tuesday, August 20, 2013

Neoliberals are destroying Europe on Purpose

The German plan for Europe is to ensure sustainable growth through structural reforms. Reforms, similar to the ones undertaken by the country in the last decade, will help the rest of the eurozone, but the southern states are not willing to do what is necessary on their own, therefore reform pressure is needed. But, this idea rooted in neoliberal thinking is deeply flawed.

Monday, August 19, 2013

Spain doubtful loans

In June the percentage of non-performing loans in Spain has hit a new high. Doubtful loans reached 11.6 percent of total assets. In November of last year Spain tried a bad bank scheme to reduce the pressure on the balance sheets. It only helped for a few months. The Banco de Espana released the June numbers on Monday, a total of € 176 billion loans was non-performing, which is lower than the € 192 billion in November of last year, due to the bad bank, but in relative terms "only" 11.4 percent of loans did not perform back when. In November and January non-performing loans were taken of the bank balance sheets, which can be seen in the following graph.
Bad, but sadly expected news. The problem will not be solved until the Spanish unemployment rate falls significantly, which will not happen until the bank balance sheets are back in order. Unless Germany after the the election decides that it should suddenly actually try to safe this union, I don't see how this can continue much longer.

Bundesbank Now a Fan of Abenomics?

The Bundesbank really has not been a fan of Abenomics. Jens Weidmann the president of the Bundesbank assessed in an interview with Deutschlandfunk in April, for example, that the causes for "the deflationary development and the restrained growth [in Japan] are not lacking liquidity, but are of a structural nature, a demographic nature, but also are due to the high public debt." Therefore a sound government policy should tackle these issues, he said. Jens Weidmann the president of the Bundesbank disagrees. In a speech at the end of last year he assessed:

Escalating public debt inevitably drives prices higher. But growing government debt can still pose a threat to price stability even before it begins to spiral out of control.
The Bundesbank(German pdf) now modeled the effect of Abenomics on growth and inflation to end the fight Weidmann v. Weidmann on the effect of public debt on inflation.

Short Note on terror "threats"

There was supposedly a terror act against US embassies imminent a few days ago, but nothing happened. Today we learn that al Qaeda might be planning to attack express trains in Europe. At least bild alleges that the NSA claims that some unnamed terrorists supposedly talked on the phone about such a plan, after everybody who is able to turn on the TV anywhere knew that the NSA is probably listening in. Well, trains have been attacked in Europe, still the timing is very strange. I am almost as scared as I was when I learned that there was a "credible" "breast implant suicide bomb threat" at Heathrow airport.

I think there are three possible explanations, I will start with the most likely one:

German Bundesliga

I will add a few posts about football/soccer in Germany, each weekend. Currently, I plan provide the following:

  • Matchday Round-up on Sundays
  • Two Game Reports (One Saturday and one either Friday or Sunday)
  • One in depth report about a team each month.
  • A short look at the changes compared to last season and where I expect the teams this season
 First up Bayern and Dortmund:

Sunday, August 18, 2013


I did not like the template I chose in the beginning, anymore. I felt that I really had to change something; and I am actually quite happy with how the blog looks now. Not much to add. Hope you like it, too.

Saturday, August 17, 2013

Finance and Engineering

Reuters looked at the Netherlands economy a country unlike Germany actually engaged in austerity.  Guess what? Contractionary policy is contractionary. What is more, the Dutch debt to GDP is not improving. Can we now just stop making this a meta story about what seems to be a technicality? This just should not be a story about multipliers, as people like Daniel Gros seem to be suggesting. This is a tale of bad economic policy based on bad economic analysis. Do not hide behind something that the average reader has not heard about.

Nobody would accept that an engineer did something like that. "Hey guys I am sorry that the crane could not handle the load; and injured the workers. I chose a multiplier (for safety) that was a tad low." In fact, when looking at the the "rescues" from an engineering perspective, we see that not only was a safety chosen which was below one. The whole system was not designed safe fail or fail safe. The only reason why the whole construction has not fallen to pieces yet is that the ECB stepped in, and wrapped the whole thing in duct tape.  And now we are again supposed to trust the economists, who

  • Underestimated the rescue funds needed
  • Claimed that austerity would be expansionary
  • Thought the euro area was a good idea in the first place
  • Did not see the financial crisis
  • Did not think that the housing boom in Spain and Ireland was in fact a bubble
  • Came up with a stress test that failed to put any stress on bank balance sheets
  • Did that again 
  • Are trying to tear of the ECB duct tape
to come up with a workable solution. Would anybody want that the engineer who designed a bridge that collapsed to design another one? No. It can only end in another disaster, especially, when we also see a reluctance to admitting mistakes. Instead, the blame is assigned to the drivers Greece.

Here's a structural reform that might actually put Europe on a path of sustainable growth in the future. Every single economist, who got at least two of the above points wrong, needs to be fired. That safes money and reduces the risk that we will see an unnecessarily prolonged downturn in the future. Of course, that is not possible, because these "scientists" for the most part call for the most predatory and completely failed form of capitalism from the safe socialist utopia, that European universities are for professors.

Can we, after five years of complete failure, at least stop listening to the people who have gotten everything wrong. Please.

Friday, August 16, 2013

Germany Poster Child for Austerity?

Daniel Gros wrote an op-ed in the Cyrpus Mail which asked: Has austerity failed in Europe? He is German, the director for CEPS an EU funded think tank, and got his PhD in Chicago. What caught my eye was this bid:

In fact, austerity has worked as advertised in some cases. Germany’s fiscal deficit temporarily increased by about 2.5 percentage points of GDP during the global recession of 2009; subsequent rapid deficit reduction had no significant negative impact on growth. So it is possible to reduce deficits and keep the debt/GDP ratio in check – provided that the economy does not start out with large imbalances, and that the financial system is working properly.
Sadly, I am not even surprised anymore.It is just annoying to see that German economists believe that austerity works; and therefore assume that it must be the reason for any positive development, which makes checking their numbers not a task they engage in. The actual story, of course has nothing to do with what Daniel Gros says. The current government has largely given up on, well, governing after about one year. At no point has Merkel increased taxes significantly, she never wanted to anyways, also expenditures weren't lowered at all. The increased tax revenue we are seeing comes from the increased employment numbers. In real terms general government expenditure has fallen, but this is due to inflation and not reforms. Here's the nominal values. (destatis)

2010 2011 2012
Total revenue 1087.38 1154.89 1193.63
Total expenditure 1190.97 1174.54 1191.28

So, he likes to tell stories that fit his believes, where numbers are not all that relevant, if they do not fit. But has austerity worked?

Austerity should thus always be beneficial for solvency in the long run, even if the debt/GDP ratio deteriorates in the short run. For this reason, the current increase in debt/GDP ratios in southern Europe should not be interpreted as proof that austerity does not work.
Right. Austerity not only not being expansionary, but also damaging the debt to GDP ratio should not be regarded as total failure. Spain and the USA both saw a housing bubble before the crisis and both countries imported more than they exported. The main differences being that Spain had a lower debt to GDP ratio to begin with, had to engage in austerity, and does not have her own currency. So what happened with GDP, the main indicator to judge the success of an economic policy, in these two countries?

This is what happens when the advisers know less than the politicians. Austerity is nnn absolutely catastrophic policy during a downturn, which is called a success on nothing but incompetence: Five years of absolute failure.

It is fitting that Germany now has become the poster child for austerity, even though the country has not engaged in any such policy.

Thursday, August 15, 2013

New Rule - Recoveries Begin After Two Consecutive Quarters of Growth

So we have seen one quarter of growth in the euro zone, now. People already start claiming that the recession has ended. Don't get me wrong, even the smallest improvement is good, but one quarter of overall extremely mediocre growth (0.3 percent) in the whole of the euro zone, average increases in France (0.5 percent) and pretty good German numbers (0.7 percent) does not mean that the recession has ended at all.

Good news: yes! End of the recession: no!

One just has to look at the at the change compared to the second quarter of 2012 to see that calling this the end of the recession is beyond ridiculous. Euro area GDP is still 0.7 % below last years number. Of course, decent growth in the two biggest economies and low average growth should get journalists thinking, that maybe articles about Spain and recovery might just be uncalled for. Bloomberg´s (via) journalists mention that:

[..] the legion of unemployed across Europe’s southern periphery [..] are seeing little benefit from an economic recovery that pulled the euro region out of its longest-ever recession in the second quarter.
 Really? Might I suggest looking at GDP for southern Europe? Spanish GDP fell by 0.1 percent, Italy´s contracted 0.2 percent. There just is no recovery in these countries. Only Portugal grew significantly. (1.1 percent); and Greece´s numbers were eaten by the dog, I guess.

Do not get fooled by people proclaiming that the recession has ended. It is a single positive quarter, driven primarily by good growth in Germany, but Germany did not have an unemployment problem to begin with.

I suggest that 1) We only call this a beginning recovery if the third quarter is also positive and 2) the end of the recession may not be proclaimed before GDP is clearly above pre crisis levels and euro area unemployment significantly below 8 %. So if what you call a "recovery" and it looks like this (see the tiny 0.3 percent at the end?):

Then, you are doing it wrong! (it is still good news, though)

Krugman not happy about good news

Krugman is not happy about the reaction by European leaders to finally seeing some growth again:

It really is kind of pathetic to see European leaders claiming vindication after one whole quarter of positive growth, at the thrilling annual rate of 1.2 percent.
Agreed, still finally seeing some growth again is actually good news. The problem there is, is that the same politicians, who failed us miserably for three straight years now pretend that they are somehow responsible for only this first actual green shoot. The German government is by far the worst offender here. Official press release:

Germany - the locomotive in the euro area 
Yeah, Germany is a locomotive alright, it is a fitting picture for a industrial country; problem is that it wasn't going all that fast since 2011. What is more is that now economy minister Rösler claims to be the only responsible party here:

Federal economic minister Philipp Rösler attributed this development to "the reduction of taxes and social insurance contributions, which were enacted at the beginning of the year."

Oh goody, let's check this:

2012 2013
health insurance 15.5 15.5
nursing care insurance 1.95 2.05
pension insurance 19.6 18.9
unemployment insurance 3 3

 Philipp Rösler is living in some fantasy land where decreasing the pension insurance, through basically keeping the pensions in the West at the level of last year and therefore below inflation, aka taking from one hand and giving the other, somehow creates growth; and the German government is responsible.  Saying something like that should make one feel really embarrassed.
He seems to actually believe this stuff. See? Pension insurance payments fell by 0.7 percent and now we have growth of 0.7 percent - coincidence?! seems to be what he is saying. This one quarter will reassure them that all steps taken were correct. If only Greece were to reduce their pension insurance by 0.7 percent...

On to four years of growth through shifting money around. The euro zone finally seeing some growth is probably the worst thing that could have happened in the second quarter, when looking at who will be reelected because of this.

Renewable Energy in Germany

Germany is trying to transition to a more sustainable energy mix in the future. You might have read one of two stories about the effort, or even both depending on your personal filter bubble.
  1. The switch away from nuclear power and fossil fuels is not going so well in Germany. The consumer prices are increasing massively. In July 2013 the inflation of electricity prices reached a whopping 11.9 %. In 2013 consumers have to pay more than €0.28 per kWh; ten years ago the price was around €0.17/kWh. Also, the contribution of lignite, black coal and natural gas to the energy mix has not changed much at all in the last ten years. Only the share of nuclear power has fallen significantly, so the CO2 production of power plants was not reduced all that much.
  2. The energy transition in Germany is happening at a faster rate than expected. In 2011 renewable energy made up 20.5 % of electricity produced; and in 2012 it was up to 22 %. This development has caused the prices at the energy exchange to fall significantly. In the first 2013 the price per MWh fell by 20 % compared to 2012. It is expected to decline some more. Of course, some of this development was caused by falling coal prices, but for example on the  June 16th this year the average price at the exchange was minus €3.33 per MWh. It fell to minus €100 per MWh for an hour and trading had to be stopped, so it is safe to assume that the huge amount of electricity produced does play a significant role in the much lower prices.
It might come as a surprise, but both stories are correct. The prices at the energy exchange are falling fast, while consumers have to pay ever more for electricity. This is due to the way renewable energy is subsidised. The owner of a renewable energy plant is guarantied a certain price for twenty years after the plant goes on line. Also, the firm is guarantied that all energy it is able to produce will be fed into the power grid (or be paid even if that cannot be the case). Especially solar energy, which was not competitive at all in 2000, when the Erneuerbare-Energien-Gesetz (EEG renewable energy law) was introduced, profited from massive subsidies. In 2004, the guarantied price was at least 54 ct/kWh for installed power on top of buildings. eight years later the price has fallen to between 18.3 ct/kWh and 24.4 ct/kWh. The resulting difference between exchange and guarantied price has to be paid by the consumers and companies (not energy-intensive ones, though).  At the moment the so called EEG reallocation charge is at 5.28 ct/kWh or over 18 percent of the total electricity price. In 2003 it was only responsible for 2.4 percent of the consumer price.

The above graphic shows the composition of the electricity prices for consumers. Today, fees and taxes make up over 50 % of the total price. The increase compared to 2003 is primarily due to the EEG allocation fee. 

The increase from around 17.2 ct/kWh to 28.7 ct/kWh in 2013 has three main sources. 
  1. Production costs, transport and especially profits have gone up due to higher resource prices, shutting down highly subsidised nuclear power plants, and to a smaller share CO2 trading.
  2. The EEG allocation fee has increased significantly, since the prices are guaranteed for 20 years additional renewable energy power plants will keep pushing the fee up, while decreasing the exchange price.
  3. The VAT (value added tax) was increased from 16 % to 19 %; of course when the price increases there is always an automatically higher absolute price for VAT to pay.
It is important to note that the EEG allocation fee is not a good indicator for the cost of the energy transition. Large parts of the the increase from 2012 to 2013 were due to underestimation of the expansion of the renewable energy sector, which caused the account responsible for the payments fall into negative territory which now has to be rebalanced. As mentioned, falling exchange prices due to the increased amount of electricity available cause the fee to increase since the difference to the guaranteed price becomes higher. Additionally, an ever larger share of industry does not have to pay the fee (28 % at the moment) which leads to a higher burden for everybody else. So it is a very distorted value, and should not be used as a "warning for other countries".
Productivity increases have pushed the price for the installation of renewable energy down, which in turn allowed the guaranteed prices to fall, therefore the future increases through the continuing expansion of the sector lead to smaller EEG allocation fee increases. The mistakes of the past (far too high subsidies for solar energy guaranteed for 20 years), will remain with the country for the whole decade though; and will make it all but impossible for the consumer prices to fall significantly.

Prices for consumers in Germany are high compared to other countries, this is due to Germany being one of the first countries to attempt a large scale energy transition. The share of renewable energy is now over 20 % and is still increasing, but additional capacity is costing significantly less than ten years ago. Eight nuclear power plants have been shut down and everybody that believed that this would lead to medium term shortages in supply has been proven wrong, completely and utterly wrong. Germany is a net exporter of electricity. Any country which now chooses to go a similar path will not face the same costs as Germany has and will be for some time. The transition does not come free, but the know-how gained in Germany will push down costs for every other country choosing a similar path.