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.
Read article
East German Economy: Demand Push Stronger than Structural Deficiencies
Wirtschaft im Wandel,
No. 7,
2007
Abstract
In 2006, growth of production was surprisingly strong in Eastern Germany. The structural deficiencies there would have suggested a slower pace. In particular, linkages with national and international business cycles have been underestimated. To a large part, the reason why output grew by 3 per cent did not come from Eastern Germany itself, but from the Old Länder and from abroad. In the New Länder, the strong upward swing in investment activity stimulated the economy. However, owing to a small increase in total income of private households, their purchasing power lagged behind.
The improved ability of East German firms to absorb cyclical impulses from exports and from Germany’s general investment activity proved to be a crucial factor. In particular, the endowment of workplaces with modern production facilities as well as the continued reduction in the disadvantages with respect to cost-competitiveness in the tradable goods sector were beneficial. The labour cost advantage compared to West German competitors increased further while the disadvantage compared to those from Central and Eastern Europe decreased.
Benefiting from these factors, economic activity in Eastern Germany will grow faster than in the Old Länder as long as the upswing in Germany and abroad remains strong. In 2007 and 2008, investments – especially in equipment – and exports will be the driving forces again. For exports, the strongly expanding markets in Central and Eastern Europe as well as in Russia will gain in importance. As income and employment prospects improve, private consumption will support the growth in production. Registered unemployment should decrease below the 1-million threshold.
Manufacturing will remain the primary force of the upswing; its advantages in production costs will not vanish as long as, even in presence of scarcity of skilled labour, salaries and wages do not increase more than in Western Germany. In the wake of robust economic growth, the New Länder will make further progress in catching up with respect to production and income.
Companies will regain support from the banking industry. Yet, investment capital still stems from public funding programmes to a non-negligible extent. In the medium run, access to credit will ease as a result of further improvements in the firms’ net worth position. However, dependency on internal funds remains high and exposes companies to comparatively strong cyclical risks. In an economic downturn, the structural deficiencies of the East German economy will impair economic expansion.
Read article
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.
Read article
Wie hoch ist die Unterbeschäftigung in Ost- und Westdeutschland? Arbeitsplatzausstattung und Arbeitsplatzlücke nach Geschlechtern in Ost- und Westdeutschland
Hans-Ulrich Brautzsch, Johann Fuchs, Cornelia Lang
Wirtschaftspolitische Blätter,
No. 2,
2007
Abstract
The paper investigates the number and structure of available jobs by gender in East and West Germany, the gap between the supply and demand of jobs by gender in both regions and the reasons for the wider “job gap“ in East Germany compared with West Germany. The analysis shows no significant difference in the number of jobs per 1000 persons in working age between East and West Germany. For women, the East German economy offers more jobs. Nevertheless, the gap between labour demand and the supply of jobs is wider in East germany. This is caused not only by problems concerning the production structure, but also by the significantly higher participation rate of women in the labour market. Reasons are the traditional behaviour of East German women and - compared with West germany - the considerably lower household income.
Read article
Is a reduction of public holidays reasonable? A contribution to the economics of Sundays.
Lutz Schneider
Wirtschaftspolitik und wirtschaftliche Entwicklung. Analysen unter besonderer Berücksichtigung ostdeutscher Regionen,
2007
Abstract
Against the background of the debate on longer labour time the article analyses the welfare effects of public holiday reductions. He argues against this simple type of extensive growth policy, which neglects the beneficial implications of generally binding leisure times. Therefore the paper gives a contribution to the question of Sunday work and its external effects, which have to be considered, when the costs and benefits of such measures are calculated.
Read article
Too old to change? The link between Age, Wage Differentials and Job Mobility
Lutz Schneider
Sozialer Fortschritt,
No. 56,
2007
Abstract
The reduced job mobility of older employees is well known. As a result, the ageing of the workforce has clear implications for labor turnover in Germany. On the basis of the IAB’s employee survey (Beschaeftigtenstichprobe) (IABS), this article analyses the impact of age on (inter-firm) job mobility. In particular, the study answers the following question: how do wage differentials between an actual and a potential job evolve during employees’ working lives? It is shown that changing jobs is less profitable for older workers than it is for younger ones. However, the analysis also demonstrates that the wage differential between jobs cannot explain the whole mobility advantage of younger employees.
Read article
asset price inflation
Tobias Knedlik, A. Knorr
Systeme monetärer Steuerung - Analyse und Vergleich geldpolitischer Strategien - Schriften zu Ordnungsfragen der Wirtschaft, Band 86,
No. 86,
2007
Abstract
Most of the influential central banks managed to bring inflation down to a sustainable path in the last two decades. However, during the same time asset prices increased significantly. From the perspective of economic policy, this development might constitute a problem in the case that price increases are not due to changes in fundamentals but are of a speculative nature. During the current past the number of asset price bubbles increased. The aim of this contribution is to analyze policy options with regard to asset price inflation. We identify the relevant markets, discuss their specific price mechanisms, discuss transmission mechanisms, and the usefulness of monetary policy and alternative instruments to deal with asset price inflation. We show that, once asset price inflation is present, monetary policy can do little to stop processes of speculative bubbles. It is the more important that that alternatives are considered. These include the analysis of monetary conditions, a straight forward communication, better regulation, and a strengthening of institutions that allow for diversifying risks to handle the necessary structural changes with lowest possible economic costs.
Read article
Effects of European Competition Policy Reform for Central East Europe - an Institutional Perspective
Johannes Stephan, Jens Hölscher
Intellectual Economics,
No. 1,
2007
Abstract
With the Central and East European countries increasingly included into the international division of labour in the European Economic space, we are prompted to ask whether this integration operates on a level playing field with respect to competition policy. In fact, a comparison between the more advanced West European countries and countries in Central and East Europe reveals that effectiveness of implementation of competition law and policy and intensity of competition are lower in the East and in particular also in the new EU member countries of Central East Europe, where the institutional framework of the West had been taken over some years ago now. In this situation, the EU recently decided to reform competition policy by delegating some of its powers to national competition agencies. We discuss whether this reform will likely spur competition or whether this may turn out to be rather ill-designed for the particularities in post-socialist economies.
Read article
Determinanten des Erfolgs im Transformationsprozess der mittel- und osteuropäischen Länder - eine empirische Würdigung der Beiträge von Karl Wohlmuth
Tobias Knedlik
Ökonomische Systeme im Wandel der Weltwirtschaft/Economic Systems in a Changing World Economy - Festschrift zum 65. Geburtstag von Professor Dr. Karl Wohlmuth,
2007
Abstract
In his academic career Prof Dr Karl Wohlmuth is, among others, concerned with questions of the economics of transformation. In early contributions regarding the transformation process of Eastern European countries, he deducts policy recommendations for a success-ful transformation process. The present paper summarizes the analyses of Wohlmuth and empirically evaluates - as an ex post analysis - determinants of success in the transforma-tion process. The central question is whether the determinants as identified by Wohlmuth had a significant influence on the success of transformation. The results are that the factors ‘reform of the private sector’, ‘liberalization of the labor market’, and ‘fiscal consolidation’ have been of special importance. It could therefore be shown that the factors that have been early identified by Wohlmuth played in deed an important role in the transformation proc-ess. Thus, his recommendations are of relevance for the ongoing process of transformation.
Read article
The East German Cement Cartel: Cartel Efficiency and Policy after Economic Transformation
Ulrich Blum
Eastern Economic Review,
2007
Abstract
In 2003 the German Antitrust Commission (GAC) proved the existence of a cartel in the German cement industry. The German cement producers involved in the case were fined € 661 million for having established quotas to extract additional rents. One of the main centers of this cartel was East Germany, where the East German Cement Combine with its giant facilities had been sold, in the early 1990s, to four large producers by Treuhand in the process of privatizing the economy. Only in respect to in this market did all defendants concede having had a part in forming a cartel.
In this paper, we challenge the argument of excess revenue that the GAC puts forward for the East German market. We argue that legal evidence does not necessarily translate into economic evidence. We show that demand for cement is realized in geographical and, to a more limited extent, in product space. Thus, in the absence of cartels we would expect monopolistic competition to prevail. We argue that any transition in the market regime, from the cartel to the post cartel period, must be traceable in the individual firm’s demand function which differs from the clients’ demand function because of costs for spatial and product differentiation. Within the framework of an econometric model, we cannot identify any structural changes in demand. Most likely, imports from Poland and the Czech Republic were dumped into the East German market and some medium sized producers were responsible for the cartel never working.
Finally the paper shows how difficult it is to generate competition in certain industries even under the umbrella of a well-established market economy, i.e. that of West Germany, and that the openness of the economy, i.e. trans-border shipments, are decisive.
Read article