Hans-Werner Sinn forecasts that the German economy will grow by 1.9% in 2014, while the non-German eurozone will effectively stagnate;
- proposes a debt conference for the eurozone;
Hans-Werner Sinn optimistic about Germany in 2014 – and pessimistic on the eurozone
We do not always agree with Hans-Werner Sinn, but these forecasts, as reported by Suddeutsche Zeitung, seem quite plausible to us. His Ifo-Institute in Munich is forecasting a strong return to growth in Germany – with 1.9% in 2014 – against 0.7% growth in the eurozone as a whole. If you consider Germany’s one-third weight in the eurozone, this forecast practically means a continued recession/stagnation in the non-German parts of the eurozone.
As for Germany, Sinn is particular looking for a strong rise in domestic demand. This optimism is also reflected by the latest ZEW indicator, which rose by 7.4 point in September to 62 points – its highest level since April 2006.
For the rest of the eurozone, Sinn sees no material progress in 2014. He is negative about France. Italy is nearly catastrophic. And in Spain and Greece unemployment remains far too high. What is needed in the eurozone is a fundamental adjustment in prices as a precondition for future growth.
Sinn makes one important suggestion – which Merkel will not like at all. He proposes a big debt conference in the eurozone to deal with existing debt stocks.
Bundestag formally elects Angela Merkel chancellor for the third time, paving the way for the Grand Coalition;
- Berthold Kohler argues that Merkel’s appeal to the German electoral lies in the perception that her policies minimise risk;
Merkel the Third
The German Bundestag yesterday formally voted Angela Merkel into the job of chancellor, the official beginning of her new Grand Coalition. A typical media comment these days is that politics is about to become very boring. Berthold Kohler writes on similar lines in FAZ, but we thought there is one part of his narrative that is worth shedding some light on in greater detail. His key argument is that the Germans hate risk-taking, and that Merkel embodies the steady hand. A majority of Germans believe that Merkel has navigated well through the eurozone crisis, and prevented a further erosion of German wealth through mutualisation of debt. She is seen as a constant in a world of variables. Even the criticism of the hidden costs of her strategy does not seem to alter the perceptions.
Charles Grant says there are great risks to David Camerons strategy to seek a new deal for the UK’s membership of the EU;
Cameron’s European gamble is a losing proposition
Charles?Grant has a very good analysis in the FT on the state of play of the politics behind the UK referendum on EU membership. His main argument is that if Cameron goes for Treaty Change to repatriate powers, he will be supported by Germany, which also wants treaty change, albeit for different reasons, but possibly by nobody else. Cameron would find a lot more support if he emphasis EU reform over repatriation of powers, but that carries other risks. Such reform could, for example, enhance the power of national parliaments to block EU laws, the liberalisation of services, limits on the right of EU migrants to welfare; streamlining of the European Commission; and safeguard to prevent euro countries harming the single market. The trouble is that this would not satisfy the anti-Europeans in the Conservative. The party is likely to be trounced by UKIP in the European elections, and they may push the party into a much more hardline stance ahead of the 2015 general elections.
Breakingviews argues that the importance of Jorg Asmussen for Mario Draghi could not be overestimated;
Breakingviews on the collateral damage of Asmussen’s exit from the ECB
This is the kind of comment where we not sure whether the authors knows something we do not know, or whether we know something that he does not know. In any way, Pierre Briançon asserts in his Breakingviews column that Jorg Asmussen’s mysterious exit from the ECB would hurt Draghi, because he was a go-between between Draghi and Angela Merkel. He writes it is hard to overstate the importance of Asmussen at the ECB. He supported Draghi’s OMT at a time when Germany was in near open revolt against the programme. Without Asmussen, Draghi might be more reluctant to do whatever it takes to get inflation up back to the target.
Giorgio Napolitano warns of an Italian insurrection;
Napolitano warns of an Italian insurrection
Reuters has a good coverage of Giorgio Napolitano address to the nation yesterday, something we would not usually report on, but we found the warnings unusually stark – especially coming from him. His address was also the main item of Italian newspapers this morning, which focus more on why Matteo Renzi did not stay for dinner at yesterday’s presidential junket than on the substance of Napolitano’s speech. He warned that unless the government reforms the country, citizens
“could get involved in haphazard and even violent protests, in an extreme and unfruitful surge of total opposition to politics and institutions…The recession is still biting ... we need strong measures beyond those approved by the government and the parliament this year and the last….The crisis affecting the euro zone has put a strain on social cohesion. The most detailed forecasts for 2014 indicate a risk of widespread social tension and unrest: a risk that must been kept in mind and confronted in Italy."
SPD members vote overwhelmingly in favour of the Grand Coalition, paving the way for the formal installation of the new government this week;
- SPD leader Sigmar Gabriel will become economy and energy minister, and deputy chancellor;
- the biggest surprise in the new cabinet is the promotion of Ursula von der Leyen to the job of defence minister – reinforcing the image of von der Leyen as Merkel’s potential successor;
- Christoph Hickmann writes that the referendum has greatly strengthened Gabriel’s leadership of the SPD, which now makes him the natural candidate to lead the party into the 2017 election;
- Heribert Prantl worries that the Grand Coalition will undermine parliamentary democracy in Germany;
SPD gives overwhelming backing to Grand Coalition
SPD members voted with a 75% majority to accept the Grand Coalition in a vote that clearly boosted the standing of Sigmar Gabriel as party leader. Gabriel himself will become deputy chancellor and minister for the economy and energy. The biggest surprise in the new cabinet was the appointment of Ursula von der Leyen as defence minister – and as now the de facto crown princess to Angela Merkel. Walter Steinmeier becomes foreign minister, a job a held in the previous coalition. Wolfgang Schauble remains finance ministers, as expected. The new government will be elected and sworn in this week.
The two most interesting comments on the new government – with opposite conclusions – came both from Suddeutsche Zeitung. Christoph Hickmann writes in a long analysis that Gabriel has reshaped his image from that of a loser of an election to a winner of a referendum. He retells the story of how he and his deputy Andrea Nahles came up with the idea of a referendum – in order not to be held hostage by a party congress that foist its policies on the leadership. But Hicksmann’s take is at its most interesting in terms his view of how the situation may now develop. He predicts that the Grand Coalition will hold to the end. Gabriel will be good at his new job, steering Germany’s change away from nuclear without raising energy costs, and will then become his party’s undisputed candidate for chancellor in 2017, with good chances to win the election.
The paper’s main political commentator, Heribert Prantl, is more cautious. He said the real danger of the referendum’s success is a corresponding reduction in parliamentary democracy, where only the Greens and the Left Party now form the opposition – with the two governing parties have enough votes to rig all parliamentary procedures, including speaking times, which is now reduce to opposition leaders to only several minutes.
The economic historian Nick Crafts, meanwhile, has done the comparative maths on the eurozone crisis and the Great Depression, and concludes that the attempt to achieve fiscal sustainability through primary surpluses is likely to fail.
Nick Crafts says the eurozone crisis is worse than the Great Depression
The economic historian Nicholas Crafts has produced some important research comparing the eurozone crisis with the Great Depression, concluding that the current situation is actually worse. Here is his main chart from his Vox column, comparing the real GDP development of the eurozone, with those of the sterling block and the gold block during the Great Depression.
The main lesson from the Great Depression is that countries that stayed on the gold standard suffered from a heavier downturn. What is less known is that exit from the gold standard could make the achievement of fiscal sustainability and the reduction of public debt-to-GDP much less painful. This is what happened with the UK.
“Compared with the late 1920s, the recovery of the 1930s was characterised by much lower real interest rates on government borrowing once price falls ended and interest rates could be reduced, and by faster GDP growth. The real interest rate on government debt fell from about 5.7% in the late 1920s to 2% in the mid-1930s, while growth increased from 2.2% per year to 3.6% per year.”
He then goes on to do the math for the eurozone. He says that trying to achieve debt sustainability through primary fiscal surpluses is going to have a very negative impact on economic growth, and will keep dept-to-GDP ratios high for a long time.
“Given that maintaining the budget surpluses required in order to eliminate the debt overhang is quite possibly beyond what is politically feasible, the risk of further defaults is non-trivial… The implications of this discussion are quite uncomfortable. They are that, under the present agreements to resolve the crisis, several Eurozone economies face a long period of fiscal consolidation and low growth. For these countries, different rules of the game with regard to financial integration and, in particular, a different sort (1950s-style) of central bank would ease the pain. An ECB designed to make life easier for the debtors would have a higher inflation target, hold down interest rates for longer, and help in eliminating some of the debt overhang. Obviously, this is not a central bank for normal times – nor is it a design that Germany could contemplate – but in a depressed economy with a debt problem it might be more appropriate. The implicit fault-line within the Eurozone is evident.”
Christine Lagarde tells the EU’s Economic and Social Committee that the multiplier was closer to 1.7 than to 1 for Greece and Portugal , and that these countries should have enjoyed more time to reduce their deficit;
IMF admits it underestimated the fiscal multiplier
Speaking at the EU’s Economic and Social Committee, IMF Managing Director Christine Lagarde said on Tuesday that the IMF made a mistake on Greece and Portugal, and that these countries should have had been given more time to reduce their deficits, reports portuguese Público. Specifically Lagarde said that, for lack of studies, the IMF had estimated the fiscal multiplier at 1 or below when in reality it proved to be about 1.7.
In a demonstration of his new powers, Matteo Renzi yesterday got the Senate to put forward an electoral bill with the support of Beppe Grillo’s party under protest from Enrico Letta’s coalition partners;
How Renzi runs rings around Letta
This story may just be a taster of things to come in the relationship between Matteo Renzi and Enrico Letta. As all the big Italian newspapers report on page one this morning, Renzi pulled a fast one by getting the Italian Senate and the Chamber to proceed with the Senate bill on electoral reform. The trouble is to get the majority Renzi’s Democrats had to team up with Beppe Grillo’s Five Star Movement, and against Enrico Letta’s coalition partners, who reacted furiously. The proposed Senate bill favours the PD (or whoever comes out top in an election), and would give them an absolute majority, as Corriere della Sera explains in a graphic. In other words, the political parties’ support for various electoral system clearly correspondent to their own (perceived) self-interest interest. The worst outcome for the PD would be a return to proportional representation, which is what would happen if the Italian parliament cannot agree an electoral law. Italian newspapers report that Letta gave assurances to his coalition partners that the new electoral law would be decided jointly by the coalition partners (in other words, not by Renzi’s ad hoc alliances). What we saw yesterday was a demonstration of Renzi’s willingness to press ahead with the one issue that matters most to him – because he will need an appropriate electoral system to assume power without coalition governments.
Yannis Papantonio argues that the eurozone has two options: move towards a federation with debt mutualisation, or split up;
Papantonio says a split-up of the eurozone is still possible
Yannis Papantonio has a column in Project Syndicate in which he sets out two possible scenarios for the eurozone’s future – one which is ruled politically by the German establishment, and one that would lead directly to the break-up of the eurozone. The latter would happen if the economic and political crisis in the south spreads, inciting fears in Germany that the country faces a long-term threat. This would drive Germany to withdraw from the eurozone, or form a smaller monetary union of the north. Under the second scenario the crisis remains contained, with Germany agreeing to pursue closer economic and fiscal union, with the mutalisation of some national debt, and the transfer of economic policy sovereignty to a supranational European institution. He says the north-south divide in Europe has become a time bomb. To defuse it require less austerity, more demand stimulus, greater investment supporter, more reforms, and genuine progress towards political union.
Irish coalition parties gained in the polls with their ‘back to sovereignty’ rhetoric about programme exit;
Irish coalition up in the polls with bailout exit rhetoric
In Ireland the Coalition parties got a significant boost according to the latest Irish Times/Ipsos MRBI poll. Fine Gael is up four percentage points and Labour is up three since the last poll in September. The polls show Fine Gael to get 30% (+4pp); Labour 9% (+3pp); Fianna Fáil, 22% (no change); Sinn Féin, 21% (-2pp); and Independents/Others, 18% (-5pp). Satisfaction with the government has also increased sharply, while PM Enda Kenny has the highest rating of any of the party leaders. Their publicity of the bailout programme exit has clearly helped their rise in popularity.
Stephen Kinsella warns that Ireland did not enough to implement reforms and that austerity without reforms leads yet to another bubble;
Kinsella says Ireland needs to reform or heads for another bubble
Stephen Kinsella in the Irish Independent writes that while Ireland was spearheading austerity it was less successful in implementing the reforms agenda. As Ireland exits the bailout programme, the EU and IMF are “clearly annoyed so few of their "reform" ideas, which they took from our own reports over the years, have actually been implemented.” Reforms take time and the current government is running out of it. “Fairly soon any chance of real reform will have ebbed away, as the political cycle takes over and unpopular decisions become the next Government's problem.” Kinsella warns that that austerity without reform leads inexorably to another bubble. Only this time, bigger.
Greek unemployment inched up to 27.4% in September, youth unemployment eased from 60.6% to 51.9%;
Greek unemployment inched up to 27.4%
The seasonally adjusted unemployment rate in September rose marginally to 27.4%, from 27.3% in August, after remaining steady at 27.3% for the two previous months, according to ELSTA data showed on Wednesday. Macropolis reminds us that the unemployment rate has almost tripled from the October 2009 figure of 9.9%. At the same time, the number of unemployed jumped by 177% to 1.38m, with the number of employed shrinking by 19.2% to 3.64m over the four-year period. Unemployment remains more prominent in the female population with a rate of 31.4% (unchanged from August) compared to 24.5% for males (from 24.3 percent in August). Youth unemployment rate eased to 51.9% in September from 60.6% in August.
Médecins du Monde evokes humanitarian crisis in Greece as a result of the crisis;
Humanitarian consequences of the crisis
More than three million Greeks or 27.7% of the population no longer have access to public health services in Greece as a direct consequence of the crisis, warns Anna Maïli from Médecins du Monde according to Le Monde. An explosion of unemployment is the main factor behind this worrying development coupled with the lack of funds to provide for children and families without healthcare coverage. As a result, many children are no longer vaccinated and pregnant women have to pay themselves for giving birth. According to Médecins du Monde more than half of the children they treated in the last nine months were not vaccinated, amid prohibitive costs of between €1400 and €1800 per child. And between 2008 and 2011 the number of dead born babies also increased by 21%.
Syriza’s radical faction insistence on euro exit cut through Alexis Tsipras plans to prepare the party for political power;
Syriza’s radical faction insist on euro exit
Macropolis has a very insightful look behind the scenes of Syriza, and how the left wing with its insistence on leaving the euro could be the Achilles verse for Alexis Tsipras and his efforts to prepare his party for power. Shortly after Tsipras gave his yet clearest statement in favour of keeping the euro in his speech at Texas University, the more radical fraction of Syriza (called Left Platform) issued a statement saying “The eurozone and the European Union have reached a point where they cannot be reformed or rebuilt, only overturned.” The Left Platform leader Panayiotis Lafazanis has long maintained this position and is the chief expresser of the current of euroscepticism within the party. Significantly, his faction gained 30% of the seats on Syriza’s central committee during this summer’s congress. Macropolis writes that “Sunday’s statement from the Left Platform appears, whether consciously or not, a response to Tsipras’s speech in Texas. If the SYRIZA leader thought that his attempt to balance political realism with political radicalism and take his party from one of strident opposition to being ready to govern was anywhere near over, he has just been reminded there is still a long way to go.” The statement puts Syriza on a defensive, and makes it vulnerable to opposition attacks, who exploit the fact that a majority of the Greeks still favour euro membership, though figures are declining.