Tuesday, May 28, 2013

Germany overheating?

R-R scared of Germany overheating? Via Brad DeLong:
We don’t see your attraction to fiscal largesse as a substitute. Periphery Europe cannot afford it and for Germany, which can afford it, fiscal expansion would be procyclical.  Any overheating in Germany would exert pressure on the ECB to maintain a tighter monetary policy, backtracking some of the progress made by Mario Draghi. A better use of Germany’s balance sheet strength would be to agree on faster and bigger haircuts for the periphery, and to support significantly more expansionary monetary policy by the ECB…
A few points:
  1. Germany cannot, will not, and probably isn't even allowed to agree to hair cuts that affect us due to the no bail out clause.
  2. Overheating in Germany? I would go along with Bavaria and Baden-Württemberg being at full employment but the other states? Especially eastern ones, really? Also every 5th employee in Germany is working for less than € 10.36, the actual number in this case might even be allot worse since companies with less than 10 employees do not have to report those numbers. Some overheating might therefore actually be helpful.  Inflation in Germany was at 1.1 % in April. German 10 bunds are at 1.5 % as of now. So nothing is pointing towards an imminent threat of Germany overheating. Now to be fair. We are actually seeing pockets of some inflation. Munich (capital of Bavaria) is the prime example. We have come to a point where "being chosen" to be the one who is "allowed to rent" a flat in the city and therefore pay is almost an honor. Also in that are even getting a quotation from a craftsman can be close to impossible at realistic prices around munich. But, again we are talking about some areas; there is absolutely no reason to believe that at the moment that Germany is even close to overheating. I'll go even further, there is a lot of room for stimulus before Germany as a whole will experience significant inflation.
  3. Pro cyclical? I don't know what the current fantasy is in the US about German growth, but here in the real world, we barely managed to stay out of a new recession.
  4. I expect that the actions by the Bundesbank in the last few years, have significantly reduced its influence within the ECB. The Bundesbank will in June openly fight against the ECB's OMT programme before the German constitutional court. In case the court follows the Bundesbank opinion, the situation might significantly change in the euro zone. If it does not, the Bundesbank's influence will probably be largely wiped out within the ECB. So either there might be extensive backtracking totally independent of "overheating", or the ECB will be basically free of the nay sayer Weidmann.

Fear Not - We Got It Covered

Prof. Krugman is deeply worried about the nightmare happening in Portugal:
And anyone playing any role in our current economic debate, whether as an actual policy maker or as an analyst giving advice from the sidelines, should be focused, above all, on how and why we’re allowing this nightmare to happen all over again three generations after the Great Depression.
 Well, Schäuble recognized the danger and has a solution according to FAZ; he even wrote a letter to his college the economics minister Rösler stating:
I think, that we should additionally offer bilateral German help. [This will lead to] a noticeably faster working support with visible, also psychologically effective results in reasonable time.
Rösler had a spokesperson answer:
The real economy in southern Europe will be helped if especially small and medium sized companies have easier access to the capital marked.
 This is in my opinion a rather awkward form of communication, but who am I to question the geniuses that believe that one billion euros in a little cheaper credit will produce visible results in Spain. Nothing is decided, yet, but the German government are discussing "intensively" and we don't have any numbers on Portugal, but it's probably not the time to hold one's breath.

Also, Germany might (pretty unlikely though) see a SPD led government in September. They are all for reduced austerity and higher taxes. Yeah, that "plan" comes from combined thinking of the Greens and Steinbrück (SPD's chancellor candidate who called Grillo a "clown". So the chances for even a small expansion in the core are zero.

Awesome times if you are a cynic in Germany. Not only are right and left competing about who has the better non-plan, no, we, gladly, also do not have to read articles about what our current policy is actually doing to the crisis countries. Yes, they do write about the high youth unemployment but just the numbers. Cold, efficient, German reporting. Want feely, feelings? Go read this story about how some fox was saved somewhere. Youth unemployment actually isn't all that bad. If you also count those who are currently at university and therefore not yet out of a job, you will see that only 20 % of young people are unemployed in Spain. This reporting is so efficient that recession isn't mentioned anywhere in the article. But "new deal" is, as if this idea actually had any chance of doing anything(this has nothing to do whatsoever with the actual new deal, it is, well a cynical joke) .

So fear not Prof. Krugman - Germany has it covered. No actual change in policy is necessary, all we needed was to steal a few words, relabel some funds, add one billion euros, stir occasionally and everything will be fine. So, yes the euro will go, but in the mean time we are doing everything necessary to ensure that it will do so with a bang.

Thursday, May 23, 2013

New Deal for Europe

Germany and France have come up with a "plan" to "solve" the youth unemployment problem in Europe. The European Investmank Bank will provide up to € 60 billion in cheaper loans to companies, that hire. They decided to call this drop in the occean "New Deal for Europe". This is either really cynical or just outright stupid. The first is probably true since this sum is so small that even polititians should realize that it won't change much for the millions of unemployed in Europe. 

€ 60 billion for seven years is around 8.5 billion per year. Last time I checked GDP for the euro zone was around € 9.5 trillion in current prices and falling at a rate of 0.4 % larger than the not even 0.1 % of additional funds they are proposing for this year. The Association of German Chambers of Industry and Commerce just reduced the its 2013 growth expectation from 0.7 % to 0.3 % in current euros that is about 10 billion. So our government is proposing a "New Deal" for all of Europe that is smaller than the damage they are letting happen to the German economy in the name of growth inducing austerity.

But fear not there is additional € 22 billion of relabled EU funds coming. Because releabling money solves problems in todays economy. "Germany and France are expected to lead" German employment minister von der Leyen said according to FAZ. The others should all follow on what is all to obviously the way into the Abbyss. But hey we at least come up with funny names ("New Deal", "Growth Innitiative") for aweful ideas, what are the others doing to make the journey more comfortable?

Friday, May 10, 2013

Weidmann in way over his head?

Weidmann is giving interview after interview is full of buzz words, but he does not make it clear what he actually wants. He is all for unnamed "reforms" and for that he thinks "reform pressure" is necessary. He could have a parrot answer the questions. For example yesterday in an interview with WAZ Weidmann answered to the question: "what would you say to the governments of countries with a youth a youth unemployment rate of above 50 %?"
Youth unemployment is indeed at dreadful levels in some countries. However, short-lived pump-priming and spending programmes and ever larger debts for subsequent generations will not create the sustainable employment which is urgently needed. For young people in particular, it is about prospects for the future. And these can only be offered by competitive enterprises and a sound economic structure. Therefore, putting reforms on hold would not help.
Seriously, what the hell is this supposed to mean? There is no plan in there. It is just stuff. Nonsensical, self-contradicting stuff. It seems to be based on the assumption that the next Siemens or BMW will plop up out of thin air in Greece, if only the government carries on with the destruction of the prospect of young people, imposed by people like Weidmann. We reduce the size of the public sector and suddenly a wild, well funded and competitive battery company appears, changing transportation forever, or something? We privatize an airport and suddenly twice as many planes - powered by newly developed Greek SCRAM jets - land? Perhaps, it would be best if he did not tell those countries anything, considering that "reforms" he supported have already caused extremely high youth unemployment with zero hope for future generations, and also ever  increasing debt. A person, so disconnected from reality, giving the same advice over and over again, even after it has miserably failed to deliver anything that he has thought it would, is in way over his head.

Or perhaps by "reforms" he means that he wants the Nazis of Golden Dawn in power in Greece. Then I would say that his advice has a great chance of success. Just like when we tried the exact same "reforms" which lead to catastrophic unemployment and then the original Nazis in the early 1930ies.

P.s.: a personal message to Weidmann: Please, please, please Mr. Weidmann refrain from advising France. Nobody will be helped by a nuclear power, who happens to be our neighbour, with the 60 % youth unemployment that Your ideas of a "saving" policy will bring to France (yeah he does not mention austerity in the actual interview in German: "Das ist für mich kein Sparen."). Please, pretty please go advise Mongolia or Indonesia or any other country of Your choosing as long as it isn't one that can wipe us of the map once Your ideas produce exactly the same results they have consistently caused in the past. Go bring confidence and reforms to someone else. You can also tell those people how it "has become difficult" to "maintain the real value of assets" with the dreadful inflation of 1.4 % we are currently facing. Were You actually confident in Your confidence scheme Spain or Italy government bonds would be worth a look.

Thursday, May 9, 2013

Two Sinns and Soros

Felix Salmon published a pretty gloomy post on the euro crisis based on a debate between Soros and Sinn. Now some of what this Sinn is writing seems to be at odds with what the German Prof. Sinn thinks. We are either talking about a person who is extremely flexible when it comes to his positions, or actually different persons, sharing the same name, profession, and awesome beard. So, since it would be quite strange to let the German Prof. Sinn answer to himself, I will to make it easier to keep the two apart call the one debating Soros just Sinn.

Sinn claims:
Leaving the euro zone is precisely what the newly founded “Alternative for Germany” party, which draws support from a wide swath of society, is demanding.
This is actually not correct. The AfD (German pdf) does in fact say that a return to the DM should not be off the table and that each country should have the right to chose its own currency in a democratic referendum, but it will also accept "smaller and more stable monetary unions". The kicker here is how they want to achieve such a new euro:

 We demand that Germany enforces this right to leave the euro by vetoing further emergency loans by the ESM
Wir fordern, dass Deutschland dieses Austrittsrecht aus dem Euro erzwingt, indem es weitere Hilfskredite des ESM mit seinem Veto blockiert

Prof. Sinn is closer to the AfD here than Soros is. In an interview on May 6th 2013 with Welt he stated:

When a country can't make due with the euro because it is not competitive it would be better for it to leave. Germany should stop artificially keeping such countries in the euro with ever increasing public loans, which will never be payed back.

Well, Prof. Sinn's position is in fact the same as the AfD's it is just note formulated as, well, precise or honest for that matter. In another interview with FAZ he said that the "arguments of the party are for the most part reasonable." So if Prof. Sinn, who thinks that Bernd Lucke et. al. "know what they are talking about", is in the eyes of Sinn probably playing with napalm.

Sinn goes on to write:
In order to regain competitiveness, the southern countries will have to reduce their goods prices, while the northern countries will have to accept higher inflation.
Prof. Sinn is against wage increases above 3 % in Germany because they should be lower than productivity growth (how exactly is that supposed to make us less competitive compared to the other countries?).  He claims that we would need a inflation of 5.5 % in Germany for a decade to achieve this without deflation in other euro zone countries, but how is that supposed to happen without wage hikes, higher government spending, or lower taxes (he was all for lower taxes a few years back, but now: *crickets*), and while industry production is stagnating? Sinn also feels that blaming Germany for austerity is "unfair" because, well, we "mitigate" the crisis. Here both Sinns agree for once and both complain that we are spending the most money and still nobody loves our government, but Prof. Sinn quite bluntly states that what "we are letting happen" in Greece is a "catastrophe" but he claims that we have "little say" (he mentions the ECB but forgets about the ESM) and still are the "old maid".

This is something the expert Hans-Werner Sinn (obviously a third and absolutely unrelated person to the other Sinns) cannot agree with. He argued in December 2012 that Germany can "force through anything" since we have veto power in the ESM.

 It is sad that the German quality journalism (TM) lets him get away with it. We are talking about a man who wants to go forward almost exactly like the AfD does, but warns that others might help the party. He believes that Germany has little say in austerity decisions, but at the same time can force through any decision. He thinks Germany should accept higher inflation, but he is against wage increases and stimulus programs  that would make that possible in a time where monetary policy has "lost its impact". So, not only has Hans-Werner Sinn "deliberately distorted and obfuscated [Soros'] argument" he is also quite capable of doublethink.

Wednesday, May 8, 2013

New Orders - end of the negative trend?

I like to show the following graph of new orders from the beginning of 2011 until February 2013 when people talk about the "powerhouse" Germany that is "withstanding" the recession in Europe:

New orders have been declining for the last two years. Yesterday the March numbers were released and seasonally adjusted (X-12-Arima) they were up 2.2 % compared to February. The economics ministry declared that "the industry seems to gradually overcome its phase of weakness". So, the second positive month in a row has them less excited than last month. Back then the statement was that the "industry IS more and more overcoming its phase of weakness". The non-adjusted new orders were pretty bad for this month. March is usually the strongest month of the year, but this year the Easter holiday reduced the workdays by two compared to 2012 and it was also significantly colder than usual, seasonal adjustment might therefore be quite tricky.

So are we seeing a new trend or is this just an one-off? The statistisches Bundesamt also uses another method for seasonal adjustments. It is called BV4.1 and in addition to seasonal adjustment it also has a useful trend cycle component. Here we see stagnation since June last year. at around 102.9 % (SA up 1.9 %), so the economics ministry is rightly careful in its assessment of the current situation. These two positive months in a row are a genuinely good sign but they do not indicate a new trend yet. The falling IFO business climate index indicates that we should not get our hopes up. Also lets not forget the euro crisis. It therefore seems unlikely that these positive numbers are more than just a blip.