Tag Archives: Economy of Germany

IMF Director Christine Lagarde Sees “Crisis of Confidence”

There seems to be some kind of revival sweeping over Europe these days, with both economists, regulators and politicians suddenly starting to realize what so many have pointing out for several years: The global crisis is actually just getting started, the stimulus and the austerity measures are just not working and the financial markets has ditched most of what little confidence they once had in governmental and institutional leaders’ ability to solve basically systemic flaws in our economic system. Today, as the markets keeps tumbling, newly appointed IMF-boss, Christine Lagarde, is telling us that a “crisis of confidence” have aggravated the situation.

“The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009.”

Christine Lagarde

“It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle,” Mrs. Lagarde says in the interview with Der SPIEGEL. But when it comes to concrete solutions, she’s just as vague as any other politician. 

The journalists, Marc Hujer and Christian Reiermann, from Der Spiegel asks all the right questions.

But Mrs. Lagarde is an experienced politician, and her answers are exactly as precise or foggy as they need to be from the IMF point of view.

Here’s the first part of the interview:

SPIEGEL: Ms. Lagarde, the global economy is slowing, markets are volatile and banks have all but ceased lending each other money. Does the situation remind you of 2008 just before the investment bank Lehman Brothers collapsed?

Lagarde: Each moment in history is different from previous situations and it’s wrong to try to draw comparisons. At the International Monetary Fund, we see that there has been, particularly over the summer, a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken.

SPIEGEL: What does that circle look like?

Lagarde: It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle.

SPIEGEL: What should be done?

Lagarde: When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks.

SPIEGEL: Don’t you think that your warning that €200 billion ($285 billion) might be missing in the balance sheets of European banks aggravates the situation of those banks?

Lagarde: In the course of our work on global financial stability, we are looking at the situation in Europe. We will publish the results of this work in a couple of weeks. More generally, we do see a need for recapitalization of European banks so they are strong enough to withstand the risks coming from sovereign borrowers and from weak growth. This is key to cutting the chains of contagion.

SPIEGEL: Is the world on the brink of a renewed recession?

Lagarde: We are in a situation where we can still avoid it. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we’ll avoid the recession.

SPIEGEL: At the moment, however, exactly the opposite would appear to be happening. Many governments have introduced austerity packages in order to make up for the vast expenditures made during the crisis. Is that wrong?

Lagarde: I wouldn’t pass general judgement on that because it’s going to be country-specific. For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation — especially if the economy weakens further, and provided there is a clear medium-term consolidation path.

SPIEGEL: Do you consider Germany to be one of those countries which could do more to stimulate the global economy?

Lagarde: In the course of our annual country checks, our experts recently visited Germany. Their conclusion was that, under the circumstances, the fiscal consolidation path adopted by Berlin was perfectly fine.

SPIEGEL: For now.

Lagarde: Of course these things always depend on circumstances. Given Germany’s heavy reliance on exports, if demand weakens so much that it really changes the equilibrium, then it would need to be revisited.

SPIEGEL: By, for example, stimulating domestic demand?

Lagarde: Domestic demand is good for both the German economy and for the other economies surrounding Germany. I do think that domestic demand in Germany has improved since the time when I floated this idea as finance minister in France.

SPIEGEL: Given the economic climate, do you not think it dangerous when countries pass laws mandating a balanced budget, as France is considering?

Lagarde: It’s clearly a signal to market players. It shows investors the seriousness of the government’s commitment to the principle of balanced finances. The general intention behind it is good.

SPIEGEL: Would you like to see the US implement such a “debt brake” rule?

Lagarde: Each country must find the best way to signal to the markets that they are serious about public finances. The IMF has a lot of experience and we would be very happy to give a hand to those countries that actually are in the process of implementing a debt brake.

SPIEGEL: Do you think the austerity measures recently agreed to in the US go far enough?

Lagarde: Which ones do you mean?

SPIEGEL: The commitment, after weeks of disagreement about the debt ceiling, to cut federal expenditures by at least $2.4 trillion over the next 10 years.

Lagarde: Such long-term commitments are a good principle because they credibly signal an intention to reduce the deficit and consolidate public finances on a more stable course, for example in health care spending. It can indicate that a country will reduce the deficit in the medium term and yet still have enough room in the short term to put in place measures that will actually stimulate growth and help create employment.

SPIEGEL: Does the US need a new stimulus package?

Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.

Read part 2 of the interview with Chrisitine Lagarde at SPIEGEL Online:

“European Leaders Have Made Very Strong Commitments”


Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy

Germany's Manic Depression

There is a saying about the Germans that they are either “himmelhochjauchzend or zu Tode betrübt” – either totally euphoric or depressed. Right now, the Germans are euphoric – at least about their economy, Financial Times columnist Wolfgang Münchau points out as German business confidence is approaching all-time high, reached in 1990 and 2007.

“We are heading away from himmelhochjauchzend to the other choice.”

Wolfgang Münchau

The Happy Faces of Vice Chancellor Guido Westerwelle and Chancellor Angela Merkel.

The mood swing of German industrialists during the first half of this year is quite astonishing, Münchau notes and ask the obvious question:  “What happened? And how should we read these data?”

Well, here’s his answer, published in today’s Financial Times Deutschland:

For a start, we should recall that the German economy contracted by 5% in 2009. Even 2.5% growth in 2010, and a hypothetically optimistic 2% growth rate in 2011, will only just get Germany back to the end-2007 of growth by end-2011.

What we have been seeing in Q1, Q2, and early Q3 is a fast recovery from a very low position after the 2009 slump.

Things are slowly returning to normal.

No Miracle

So when discussing the German economy, it is important to look at actual levels, not just at relative shifts. If you compare German and US real GDP, say over the last 10 years, the US is faring better both in terms of the total period, but, most importantly, also in terms of catch up to the pre-crisis level of real GDP.

The data, at least up until the first quarter, do not suggest that there is a particular German miracle.

All they show is a somewhat greater degree of volatility. Germany slumped faster than the others, and is recovering a little faster.

That’s it.

German Business Confidence. July 2010.

Not Sustainable

I expect Germany’s relative performance to be better this decade, by a little, not by a lot.

We should be clear about why this is likely to be the case. This has nothing to do with productivity enhancing reforms – or some underlying structural features of the German economy.

The main reason is the country’s success in depressing its real exchange rate.

Germany is now reaping the dual benefits of the depreciation of the real exchange rate inside the euro zone, and the nominal depreciation of the euro from the $1.40 plus level to the $1.20 plus level.

Can this be sustained?

Probably not. If the current developments persist, German companies are bound to hit capacity limits shortly, which will in turn put some pressure on the labor market. I have heard estimates according to which we may not be all that far away from that situation.

I would thus expect the Germans on the ECB’s governing council to press for a monetary exit relatively soon. They need higher interest rates to prevent German wages from rising.

If they succeed, Germany’s imbalanced growth strategy might continue for a little while, but this would clear come at the expense of any adjustment within the euro zone.

It really is a zero-sum game.

3 Arguments Against Recovery

I suspect that Spain and southern European countries may not be able to close the competitiveness gap with Germany quickly, but at the same time it is hard to conjecture that the gap might continue to rise further.

In addition, I see three structural factors that speak against the sustainability of the upswing.

They are the decrepit state of the banking system, the global economy, and the self-imposed balanced budget rule. Overtly, the German banks did alright in the stress tests.

The results are not all that different than for the EU average. What the stress tests do not mention is an over-reliance on hybrid capital – which is at best only partially a risk-absorber in a crisis.

If you removed the hybrid capital, the German Landesbanken would be effectively insolvent.

The second factor is the global economy, on which Germany’s export model depends. Unless the upswing is sustained on a global level, Germany will not be able to maintain the most recent momentum.

And finally, the self-imposed constitutional fiscal rule will not have much impact in the short term, as the 2011 fiscal consolidation is relatively modest. But it is likely to be a constraint further down as we proceed through the economic cycle.

There is some cyclical leeway in the rules, but the average allowed deficit of 0.35% is extremely tight, and its legal force is significantly higher than previous soft-constrained budget rules.

Fiscal policy is likely to be a constraint on growth for some time.

A Ricardian Reality Show

The German official line is that the increase in public savings will be perfectly offset by a decrease in private sector savings.

Wolfgang Münchau


They really do believe in all this Ricardian equivalence stuff, despite the fact that there is no empirical support in its favor.

In summary, Germany may still outperform southern Europe, but then so will almost everybody else.

With fiscal and monetary tightening ahead, less scope from windfall gains in the real exchange rate, and a persistently under-capitalized banking sector, it will be tough to maintain the most recent momentum.

In other words we are heading away from “himmelhochjauchzend” to the other choice.

By Wolfgang Münchau


Financial Times Deutschland


Related by the Econotwist:

Merkelomics, The Euro Zone And The United States

Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result

German Banks With More Than 200 Billion Euro In Faul Credits

Global Economy On Fast Track To Disaster

Warns Against Euro Zone “Elite”

Why Optimists Are Wrong About The Euro Zone

Goodbye Keynes – Hello Ricardo!


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Filed under International Econnomic Politics, National Economic Politics