High public deficit not only because of Corona - Medium-term options for action for the state
According to the IWH's medium-term projection, Germany's gross domestic product will grow by an average of ½% in price-adjusted terms in the years to 2025, which is 1 percentage point slower than in the period from 2013 to 2019. This is due not only to the sharp slump in 2020, but also to the fact that the labour force will decline noticeably. Government revenues will be expanding much more slowly than in previous years. Even after the pandemic crisis is overcome, the state budget is likely to have a structural deficit of about 2% relative to GDP if the legal framework remains unchanged, and the debt brake will continue to be violated. Consolidation measures to reduce this deficit ratio to ½ % would push production in Germany below the normal rate of capacity utilization. Simulations with the IWH fiscal policy model show that consolidation on the expenditure side would reduce production by less than consolidation on the revenue side. There is much to be said, also from a theoretical point of view, for not abolishing the debt brake, but for relaxing it to some extent.
Recovery Loses Momentum – Economy and Politics Still Shaped by the Pandemic
The corona pandemic has left substantial marks on the German economy and its impact is more persistent than presumed in the spring. In their autumn reports, leading German economic research institutes have revised their economic outlook downwards by roughly one percentage point for both this and next year. They now expect gross domestic product to fall by 5.4 % in 2020 (previously 4.2 %) and to grow by 4.7 % (5.8 %) in 2021 and 2.7 % in 2022. The downgrade of the forecast follows a more pessimistic assessment of the recovery, which is being held back by those sectors that are particularly dependent on social contacts. The precrisis level of output will not be reached until the end of 2021 with GDP remaining at 2.5 % below the level that would have prevailed without the pandemic. Despite massively falling back on shorttime working schemes, an estimated 820,000 jobs were lost due to the crisis. The government will run a record high budget deficit of 183 billion euros in 2020. In 2021 and 2022, deficits will remain substantial at 118 billion euros and 92 billion euros, respectively.
Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Journal of Financial Stability,
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
14.10.2020 • 22/2020
Economic slump in East Germany not as severe as in Germany as a whole ‒ Implications of the Joint Economic Forecast and new data for East Germany
The German economy started recovering quickly after the drastic pandemic-related slump in spring 2020. The recovery, however, loses much of its momentum in the second half of the year. The Joint Economic Forecast predicts that production levels seen before the crisis will not be reached again until the second half of 2021. In principle, the East German economy is following this pattern, although the economic slump is likely to be somewhat milder.
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14.10.2020 • 21/2020
Recovery Loses Momentum ‒ Economy and Politics Still Shaped by the Pandemic
The corona pandemic leaves substantial marks in the German economy and its impact is more persistent than assumed in spring. In their autumn report, the leading German economic research institutes have revised their economic outlook downwards by roughly one percentage point for both this and next year. They now expect gross domestic product to fall by 5.4% in 2020 (previously -4.2%) and to grow by 4.7% (5.8%) in 2021 and 2.7% in 2022.
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ekordschulden gegen Corona-Folgen sind finanzierbar – schuldenfinanzierte Konsumstimulierung aber nicht zielführend
Auf große Wirtschaftskrisen reagiert die Finanzpolitik häufig mit einer massiven Ausweitung der öffentlichen Verschuldung, so auch in der gegenwärtigen Coronakrise. In diesem Beitrag wird gezeigt, dass die deutsche Schuldenbremse die Tragfähigkeit der öffentlichen Finanzen auch dann gewährleistet, wenn im Abstand von zehn Jahren Krisen auftreten, in denen die Neuverschuldungsgrenze außer Kraft gesetzt wird. Die Tragfähigkeit zusätzlicher Staatsschulden begründet jedoch nicht deren Sinnhaftigkeit. Diskretionäre Finanzpolitik zur Stimulierung der gesamtwirtschaftlichen Nachfrage leistet insgesamt einen eher kleinen Anteil zur Stabilisierung der realwirtschaftlichen Entwicklung. Maßnahmen zur Eindämmung der Corona-Epidemie, für den Ausgleich tatsächlicher sozialer und wirtschaftlicher Schäden und für die Aufrechterhaltung des Bildungsbetriebs unter den Bedingungen einer Epidemie könnten einen wichtigeren Beitrag zur Krisenbekämpfung leisten als kurzfristige Nachfragestimulierung.
16.09.2020 • 18/2020
Economy recovers from the shutdown – but a quick return to pre-crisis normality is unlikely
The German economy has bounced back strongly over the summer, recovering a considerable part of the production slump caused by the shutdown in spring. Nevertheless, real gross domestic product in 2020 is likely to contract by 5.7%. In 2021, growth is expected to average 3.2% according to IWH autumn economic forecast. The decline in production in 2020 is likely to be less pronounced in East Germany com¬pared to Germany as a whole.
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Private Equity and Portfolio Companies: Lessons From the Global Financial Crisis
Journal of Applied Corporate Finance,
Critics of private equity have warned that the high leverage often used in PE-backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested ("dry powder"), could increase the resilience of PE-backed companies. In their study of PE-backed buyouts in the U.K. - which requires and thereby makes accessible more information about private companies than, say, in the U.S. - the authors report finding that, during the 2008 global financial crisis, PE-backed companies decreased their overall investments significantly less than comparable, non-PE firms. Moreover, such PE-backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE-backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.
06.08.2020 • 15/2020
IWH Bankruptcy Update: Number of Employees Affected by Bankruptcy Continues to Rise in Germany
In July, more than three times as many jobs were impacted by corporate bankruptcies in Germany in comparison to the monthly averages from early 2020. The July figure was also significantly higher in relation to the previous month. By contrast, the number of bankruptcies fell slightly. These are the main findings of the most recent IWH Bankruptcy Update published by the Halle Institute for Economic Research (IWH), which provides monthly reports on German bankruptcies.
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06.07.2020 • 13/2020
IWH issues warning of a new banking crisis
The coronavirus recession could mean the end for dozens of banks across Germany – even if Germany survives the economic crisis relatively unscathed. An analysis by the Halle Institute for Economic Research (IWH) shows that many savings banks and cooperative banks are particularly at risk. Loans worth hundreds of billions of euros are on the balance sheets of the financial institutions concerned. IWH President Gropp warns of a potentially high additional burden for the already weakened real economy.
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