Germany's post-recession stimulus

 

The German coalition late last night agreed on the stimulus, after an evening of heavy-handed negotiations. Here is how the €50bn, two-year package is constructed, according to German television. The story came too late for the newspapers.

·         The government creates a €100bn fund for loan guarantees to industrial companies through the government-owned KfW bank. KfW will guarantee up to 80% of the loan.

·         The heart of the stimulus package itself is a public infrastructure investment programme of €18bn.

·         The lower tax rate is cut from 15% to 14%, and the tax free allowance raised by €340 to €8004.

·         Health care contributions fall by 0.6pp to 14.9%, for both employers and employees. This means that German wage costs are falling.

·         A one-time bonus of €100 per child

·         More help for employers forced to work reduced hours.

·         A €2500 lump sum for anybody who sells a car at least 9 years old to buy a new one.

 

The tax measures are to take effect July 1, in other words a full nine months after the financial crisis started to turn into an economic crisis. As some forecasters are already expecting a Q2 upturn, Germany's stimulus is likely to be mostly pro-cyclical.

There is a small “competitiveness” component in the form of reduced health care costs, which means that this part of the stimulus will help German companies at the expense of others.

 

Standard & Poor’s threatens downgrade of Spain’s sovereign ranking

The rating agency S&P said yesterday that Spain’s sovereign rating of AAA may be revised because of pressure on the country’s public finances. This follows similar warnings last week for Greece and Ireland. The FT reports that S&P had placed its triple A ratings for Spain’s long-term foreign and local currency debt on “credit watch with negative implications”, which means the rating could shortly be downgraded, because of “the significant challenges facing the Spanish economy as it traverses a period of very weak growth”.

 

Austria not to follow Germany on stimulus
Austria is not to follow German example with another stimulus package reports Der Standard.  The Austrian government said that such a package would lead to competitive distortions and that they would prefer to focus on bank recapitalisation instead. The current Austrian stimulus package includes €50m for private companies, but is considered by the industry as too small to make any difference. They lobby instead for loan guarantees similar to the German example arguing that banks seem to have no inclinations to lend to the industry prefering to hoard the money on ECB accounts, with deposits reaching a new record of €315bn. 

 

Narrow Money shows sign of improvement

The measure of narrow money M1 is improving again, having fallen sharply during the crisis. Some economists see this as a sign that the economy is stabilizing again in the second half of 2009. FT Deutschland, which has the story, also discusses how meaningful these data are. It could be that people withdrew cash during the acute phase of the banking crisis. Now that the banks are stabilizing, that money comes back. In other words, M1 may be less significant than previously.

 

 

SPD against Bad Bank

Conservative German politicians and representatives of the banking industry have recently lobbied hard for the establishment of a bad bank, a state-owned institution that would buy all the bad assets from the banks. It is a variant of the original TARP proposal by US Treasury Secretary Hank Paulson. The SPD has now come out against it, and FT Deutschland says in an editorial that a bad is not necessary, and possibly damaging. The combination of lower interest rates, and government guarantees and recapitalization would be sufficient to maintain credit to the private sector.

 

 

Giscard on Europe in the crisis

In an interview with Le Monde Valery Giscard d’Estaing says that the euro protected its economies in the financial turmoil. But he said it was less clear whether the crisis will strengthen Europe, since economic policy became more national. He is sceptical, however, on the purpose of a co-ordinated policy response, and seemed to side with Merkel, rather than Sarkozy, on the need to respect the Maastricht criteria.

 

 

For how long will the US be able to fund its deficit at current cost?

Brad Setser has done the math, and is not optimistic. In 2008, the US placed more than $1.500bn in treasuries on the market without pushing yields up. But running a deficit in normal times is not the same as running a deficit in a global economic crisis. He says the factors pushing foreign central banks to buy US Treasuries are all subsiding. The implication is that we might see demand shifts this year.

 

 

The recession will be over sooner than you think

Nicholas Bloom and Max Floetotto argue in Vox that things are looking up. A key source of the today’s economic weakness is uncertainty that led firms to postpone investment and hiring decisions. This column, by the authors whose model forecast the recession as far back as June 2008, report that the key measures of uncertainty have dropped so rapidly that they believe growth will resume by mid-2009. This means any additional economic stimulus has to be enacted quickly. Delaying to the summer may mean the economic medicine is administered just as the patient is leaving the hospital.

 

 

 

Competitive Devaluation Watch

The FT has a report in which Brian Lenihan, the Irish finance minister, accuses the UK authorities of devaluing the pound by expanding the UK money supply, something that was causing “immense difficulties” in the Irish economy. “It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of weapon,” he said.

 

 

Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.

 

---