Global Economic Watch


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  • Draghi Stands By European Central Bank Reform Policies

    European Central Bank head Mario Draghi deserves some credit for starting the year off with courage. He sat down for a candid interview with German newspaper Der Spiegel, and answered some tough questions. Darghi defended the ECB's approach to crises in Greece and other struggling EU nations. And he took on criticism coming from German politicians and pundits. Here is an excerpt: SPIEGEL: We have a feeling that the number of governments which can no longer hear your tune is growing. The new coalition government in Germany, for example, wants to undo the pension reforms made by the former coalition government comprised of the center-left Social Democrats and the Green Party years ago and introduce a universal minimum wage of €8.50 ($11.67). Are these policies that help the euro? Draghi: It is too early to assess the policies of the new German government. I can only say that the crisis has shown that the monetary union is incomplete and that the weaknesses need to be remedied. Germany helps the euro best by further strengthening its competitiveness and promoting growth. Whatever helps that process is right, everything else is wrong. SPIEGEL: Many economists represent a completely different theory. They regard Germany's competitiveness as the real problem of the euro area and are calling for state curbs on exports. What do you think of that? Draghi: Not much. It's a mechanistic perspective of economic activity, and there's little I can do with it. We won't make the weak stronger by making the strong weaker, as a very wise man once said. That applies to the economy as well. If Germany were less competitive, the euro area as a whole would lose, because less could be produced then. SPIEGEL: In Germany, ECB policy is unpopular because you have now pushed the interest rates for investments down so far that they are often no longer enough to compensate for inflation. In other words, only fools save. Draghi: That's not the fault of the ECB The link between the short-term interest rates set by the ECB and the long-term interest rates paid on investments which are relevant for savers in Germany is not very strong. SPIEGEL: Really? It's a stated goal of your policy to indirectly suppress long-term interest rates. Draghi: No, especially in recent years, we were unable to control long-term interest rates -- because investors were very unsettled by the euro crisis. That's why everyone has been taking money into Germany to buy safe German government bonds. That's why the interest rates in Germany have fallen. We take the concerns of savers very seriously. But how can we respond? We run monetary policy for the entire euro area, not for a single country. If we are able to dispel the uncertainty, many investors will again take their money out of Germany and back to their home countries and interest rates will rise again. Read the full interview here . Hat tip Antonio Fatas .
  • Germany's Weakening Infrastructure May Be a Sign of Larger Economic Vulnerability

    Germany continues to be hailed as the model developed economy--the one that has braved the storm while others have paid the price for careless economic policies. But talk to any of your German friends this summer and you are likely to hear them complain--if not about the overall strength of the economy, then about potholes and slipping train reliability. Der Spiegel does a bit of an ego-check in this week's issue. Apparently, the German Institute of Economic Research has come out with a report that "paints the picture of an ailing economy that has been seriously out of balance for years." The diagnosis is alarming. Although Germany has weathered the financial and economic crisis better than all other large industrialized nations and created over a million new jobs, this comes largely thanks to years of wage restraint by the country's trade unions. To make matters worse, the productivity of these jobs -- a decisive aspect of long-term growth and prosperity -- has contributed just as little to the current upswing as consumer demand, which has been an important growth driver in other countries. The Berlin institute points to a chronic lack of investments as the main cause for this low productivity. Both the state and the private sector spend too little money on infrastructure, education, plants and machinery. "Despite all the successes of the past few years, Germany has not created an investment basis to ensure robust growth," the researchers conclude. In other words, Germany is living off its reserves. Bridges are crumbling, factories and universities are deteriorating, and not enough is being spent to maintain phone networks. This has resulted in a massive impoverishment of the country, according to DIW calculations. Nearly 15 years ago, the state's net assets still corresponded to 20 percent of gross domestic product (GDP). When adjusted for inflation, this amounts to nearly €500 billion ($650 billion). By 2011, this had dwindled to 0.5 percent of GDP, or a mere €13 billion, primarily due to systematic neglect. All of Germany's political parties have pledged to spend more money on highways, transportation and education during the upcoming legislative period -- but they have often made such promises in the past. In the end, however, the already meager budgets for investment were slashed and the money was distributed to preferential groups of voters. It could be a similar story this time around. As for the infrastructure investment problem, take a look at where Germany stacks up: Read Ailing Infrastructure: Scrimping Threatens Germany's Future here .
  • German Exports Set to Hit Record High

    There seemed to be no bright lights for European economies in 2012. But perhaps we were not looking closely enough at what was happening in some of the EU's stronger economies, like Germany. While we were watching Angela Merkel and German citizens struggle with how debt crises in Greece and Spain and Italy would affect everyone in the Euro Zone, German exports, apparently, were doing quite well. From Der Spiegel : In the first 11 months of 2012, exports grew 4.3 percent to €1.018 trillion ($1.335 trillion), the Federal Statistics Office said. Stagnant sales to the rest of the European Union contrasted with a 10.4 percent jump in exports to non-EU nations. Separately, the Federation of German Wholesale, Foreign Trade and Services (BGA) said it expects the value of exports to have reached €1.103 trillion in 2012 as a whole, a four percent rise over 2011, when they exceeded the €1 trillion level for the first time. It also forecast slightly stronger export growth of 5 percent in 2013, to €1.16 trillion. Still, exports weakened at the end of 2012, pulled down by slumping demand in Europe, Germany's biggest market. Some key questions emerge from this report: 1) What does this tell us for the overall global impact of a declining Europe? 2) What role does the weakened value of the euro play in increasing sales of German exports in the U.S., Brazil, China? 3) What might the impact of continuing growth of German exports be on other European economies? Read the full article here .
  • Rogoff on Greece's Future in the EU

    Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff . Like many economists, Rogoff believes Greece's leaders have a lot of work still to do. And he is firmly in the more austerity camp. He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro." In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden. Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU. SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading? Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions. SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart? Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s. SPIEGEL: Does that mean the whole idea of the euro was a mistake? Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically. SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled. Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union. Read the full interview here .
  • Linde CEO Reitzle: EU's Debt-Ridden Economies Should Push Through Reforms, or Germany Must Consider Withdrawing

    Der Spiegel has a fascinating, and at times provocative, interview with Wolfgang Reitzle , one of Germany's most prominent and respected business leaders. Reitzle argues that, while he does not expect the euro zone to fall apart, he believes that the EU's leading economies, Germany in particular, need to draw some clear lines to prevent policy makers from doing too much to protect the currency. And he, like so many Germans worth a fraction of his wealth, is tired of feeling like his country has to keep propping up Greece and Italy. Here is an excerpt from the interview: SPIEGEL: Are you saying that withdrawing from the monetary union would be advantageous for Germany? Reitzle: No, but I believe that the German economy would have weathered such a shock within a few years, and would even become more competitive in the long run. To put it clearly: I don't think this scenario is desirable, but it also shouldn't be declared a taboo. And from a personal standpoint, I don't agree with a large share of my taxes ending up in countries that don't manage their economies responsibly. SPIEGEL: At the moment, the German economy is actually benefiting from the crisis. The weak currency and low interest rates act like an economic stimulus program. Reitzle: And we need this prosperity, because it's inevitable that we will be presented with the bill for the euro in the end. But this imbalance in the euro system must be corrected in the long term. The debt-ridden countries don't just have to reduce their debts. They also have to revamp their economies… SPIEGEL: …which is difficult, if not impossible, because they lack their own currency to devalue. Reitzle: And that's why the lack of competitiveness in the euro zone has become practically set in stone. If Italy still had the lira, it would have been devalued long ago to make the country competitive again, because wages there, as in Spain and France, have risen far too quickly -- in sharp contrast to Germany, by the way. SPIEGEL: But all of this shows that the euro brought together things that don't belong together: highly developed, industrialized nations and agricultural countries… Reitzle: …as well as different mentalities. And, most of all, countries that are dissimilar in terms of efficiency. It is evident that the euro was introduced far too soon. In retrospect, anyone can come up with the perfect explanation for why all of this couldn't possibly work. But that doesn't do us any good. Now we have to see where we stand and what steps to take so that everything doesn't fall apart. There's more to it than just muddling through. Germany is being given the leading role here, whether we like it or not. Not everyone ticks the way the Germans do, but sloppy economic management will no longer be tolerated. There will still be substantial differences, just as there are in the United States of America. SPIEGEL: Do you see the United States of Europe as a goal? Reitzle: Yes, in the long term. In 2050, the United States will still be a global power and China will probably be the dominant economic power. Europe will only be able to keep up if it manages to achieve a political unification process in addition to the monetary union, and if it includes Russia. However, if we even mess up the monetary union, Germany will be an attractive island, just as Switzerland is. But will we be relevant in the world anymore? Probably not. That's why it's worth doing everything we can. Read the full interview here .
  • Der Spiegel Sounds the Alarm on Protectionism

    Thanks to Barry Ritholtz , the graphic below from the German paper Der Spiegel caught our eye. It is a strong illustration of the growing global trade imbalances: The bipartisan push in the US House of Representatives to respond to China's apparent ability to manipulate currency markets has been big news globally, and clearly caught the attention of Der Spiegel: The trade conflict between Beijing and Washington has thus entered a new, acute phase. One month before the high-stakes mid-term congressional elections, America's representatives, alarmed by nearly 10 percent unemployment and a gloomy economic outlook, have rediscovered an old friend: protectionism. At the same time, they have pointed the finger once again at their favorite enemy: China. They are demanding that China finally adjust its currency so that Chinese products are no longer much cheaper than those manufactured by its US competitors. Things are heating up in the conflict between the US and China: verbally, legally and politically. The economic power of the 20th century wants to cut the 21st century's economic giant down to size. The question is whether it is even still strong enough to do so -- and whether such a conflict won't end up harming everyone. For a long time, the US economy has been dependent on cheap products made by the Chinese and on their currency reserves that bolster the value of the dollar. Until now, both sides have benefited from this system. One side lived beyond its means and paid with printed pieces of paper called dollars, the other side used this paper to purchase US government bonds, allowing it to accumulate huge currency reserves. But things can't continue like this forever. Imbalances in world trade are growing increasingly large, and the global currency system is getting out of control. Read The Specter of Protectionism: World Faces New Wave of Currency Wars here .