German Economy Drawn into the World Recession
Wirtschaft im Wandel,
1. Sonderausgabe
2009
Abstract
In spring 2009, the world economy is in a deep recession. The intensification of the financial crisis in autumn has caused a sharp contraction of demand. The reaction of monetary and fiscal policy was substantial, but up to now (April 2009), it has not succeeded in restoring confidence of economic agents. Although some leading indicators point to a stabilization of production in the coming quarters, the downturn will not come to an end before next winter, because the financial crisis will continue to put strain on the real economy for some time to come.
The German economy is in its deepest recession since the foundation of the Federal Republic. Germany is particularly affected, because at the core of the economy is the production of those goods for that world demand has collapsed most: capital goods and high-quality consumer durables. While exports and private investment activity will continue to shrink this year (albeit at a slower rate), private consumption will be a stabilizing factor for some time, as will public investment activity in the second half of the year. Later in 2009 and in 2010, rising unemployment will depress consumption, while in this forecast, it is assumed that exports and investment slowly recover in 2010, because the financial turmoil will calm down.
For economic policy, a recapitalization of the banking sector should have priority. The ECB should lower its key interest rate to 0.5%. Given the sharply increasing fiscal deficits, a new, third fiscal program would be counterproductive. Only if monetary policy fails to stabilize the economy, further fiscal measures, coordinated at a European level, should be considered.
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A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries
Hubert Gabrisch, Lucjan T. Orlowski
IWH Discussion Papers,
No. 10,
2009
Abstract
We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
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Are Public Debts of the German Federal States Influencing their Financial Scope?
Sabine Freye
IWH Discussion Papers,
No. 12,
2009
Abstract
The German Federal States have little impact on their budget. Both, revenues and ex-penditures, are basically determined by federal and European law. For a long time, this situation has been causing increasing debts. Today, public debts are again a top issue. The planned federal “debt brake” includes a gradual reduction and an interdiction of structural debts as from 2020. In a short perspective, this means an additional financial limitation to the public budgets. With regard to the described situation, the main question of this paper is: Do the German states actually have financial scope to realize the implementation of the planned “debt brake”? The analyses show that the financial scope for reducing their structural debts is particularly small in the five Federal States benefitting from additional transfers as from 2010. The highest budget restrictions do show the city states Berlin and Bremen.
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Interest Rate Convergence in Euro Candidate Countries: A Dynamic Analysis
Hubert Gabrisch, Lucjan T. Orlowski
Wirtschaft im Wandel,
No. 5,
2009
Abstract
The study advocates a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, the study tests empirically volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the euro zone yields during the January 2, 2001 to January 22, 2009 sample period. Results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, the study finds some divergence of relative bond yields. One can argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
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The Exchange Rate of the Euro Cannot be Explained Fundamentally even Ten Years after the Introduction of the New Currency
Tobias Knedlik
Wirtschaft im Wandel,
No. 1,
2009
Abstract
On first of January 2009, the Euro’s tenth birthday can be celebrated. The introduction of the Euro led to diminishing importance of trade in foreign currency for the Euro-countries. However, a significant part of foreign trade of Germany and other Euro-members is still nominated in foreign currency. Therefore, the external value of the Euro plays a crucial role for the European economy. Since the early depreciation of the exchange rate just after the introduction until 2000, an almost steady increase in the external value of the Euro could be observed. The contribution elaborates on the exchange rate development and tests whether the Euro was following a path as it would be predicted by both, the interest rate parity theory and the purchasing parity theory. Both theoretical approaches are not able to explain the specific valuation figure of the Euro. For the conduct of economic forecasts, it is to conclude that modelling exchange rate developments as random processes can be legitimate. Regarding exchange rate policy, it remains to ask which alternative policy approaches might be better suitable for the European economy.
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Exchange Rates and FDI: Goods versus Capital Market Frictions
Claudia M. Buch, J. Kleinert
World Economy,
forthcoming
Abstract
Changes in exchange rates affect countries through their impact on cross-border activities such as trade and foreign direct investment (FDI). With increasing activities of multinational firms, the FDI channel is likely to gain in importance. Economic theory provides two main explanations why changes in exchange rates can affect FDI. According to the first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if investment depends on firms’ net worth (capital market friction hypothesis). According to the second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of these two explanations. We analyse the implications of the model empirically using a dataset based on detailed German firm-level data. We find greater support for the goods market than for the capital market friction hypothesis.
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The Changing Role of the Exchange Rate in a Globalised Economy
Irina Bunda, Filippo di Mauro, Rasmus Rüffer
ECB Occasional Paper Series,
No. 94,
2008
Abstract
In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important cross-country differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area. JEL Classification: E3, F15, F31
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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Business Cycle Update Summer 2007: German Upswing Still Healthy
Wirtschaft im Wandel,
No. 8,
2007
Abstract
In the summer of 2007, the economies of the European Union and Japan continue their upswing, while the USA is still suffering from economic weakness. The expansion of the East Asian economies remains highly dynamic. Compared to the beginning of the year, conditions at the global financial markets have deteriorated slightly: Long-term interest rates have risen considerably; with notably more than half of a percentage point the increase was especially pronounced in the Euro Area. Furthermore, markets have become increasingly volatile. The less favourable conditions at the global financial markets, among other reasons, will cause the upswing in the Euro Area and Japan to slightly slow down. While the USA will not enter a phase of stagnation, the economy will continue to expand at rates below its potential until 2008. In Germany, the economic recovery took a temporary break in the first half of 2007. While special circumstances (first, brought forward purchases in anticipation of the increase in the value added tax and second, the high construction activity because of the end of home owners subsidies) raised considerably economic activity towards the end of 2006, they caused a downturn in demand in the beginning of 2007. After this short dip, the upswing will recommence. Private consumption will be the main driving force, as incomes have increased considerably in the wake of the improved labour markets conditions. The upswing will continue next year, albeit at a slower pace. Higher interest rates, the appreciation of the Euro and the expected rise in labour costs will have some impact. Overall domestic demand will slow down, but only a little, as household consumption increases. GDP will expand by 2.6% and 2.5% in this and next year, respectively. The number of unemployed persons will decline below 3.5 million in 2008.
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Institutionelle Defizite und wachsende Spannungen in der Euro-Zone
Hubert Gabrisch
Wirtschaft im Wandel,
No. 7,
2007
Abstract
The introduction of the Euro was certainly a success. Nevertheless, behind this success one may find some increasing asymmetries and imbalances across member countries, which may undermine the stability of the common currency in the long run. Tensions include the paralysis of fiscal policy, increasing divergence in per capita income, a high volatility of real state prices, and diverging unit labour cost developments. The given forms of macroeconomic coordination seem not to be appropriate to mitigate the problems. Obviously, countries can compete with wage policy only after currencies and their exchange rates were abolished, and the use of fiscal policy has been restricted. In particular, Germany and Austria were successful in competitive wage policy, while countries like Spain, Greece, Portugal, Italy, and also France did not yet use the competitiveness channel. Germany was able to reduce its unit labour costs more than other countries by labour market reforms and higher indirect taxes in replacing social taxes. However, the advantage may proof to be temporary only, for other countries will be forced to follow the German example. Given an ECB inflation target of 2 %, more competitive wage policy in the Euro area might jeopardize the stability of the currency through deflation and higher unemployment. It does not wonder that the discussion on other and new forms of macroeconomic coordination revived recently. This debate does not only include the introduction of a central EU budget with anti-cyclical effects, but also forms of direct and indirect coordination of national wage policies. In any case, it would be useful to oblige national wage policies to obey the common interest of the Union.
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