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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


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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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Finns Outraged By Swedish Plans To Bring Estonian Builders To Finland

Anger has been raised among local people by the Swedish-based multinational construction company Skanska plans to recruit some 40 Estonian construction workers to build new premises for the ICT Agency HALTIK in Rovaniemi when there are nearly 400 unemployed construction workers in the area.

”The labor markets are already out of control in the Greater Helsinki area.”

Heimo Lahtela

The Swedish-based multinational construction company Skanska plans to recruit some 40 Estonian construction workers to build new premises for the ICT Agency HALTIK in Rovaniemi. Anger has been raised among local people by the fact that there are nearly 400 unemployed construction workers in the small town in northern Finland.

The figure for the all of Finnish Lapland is more than 1,000, Helsingin Sanomat reported last week.

The estimated number of foreign construction workers working in Finland is as high as 30,000. At the same time, there are some 14,000 jobless construction workers in Finland.

The members of the Finnish Construction Trade Union in Rovaniemi have held a work stoppage on Friday in protest against Skanska’s action.

In addition, MP Esko-Juhani Tennilä (Left Alliance) has made a parliamentary inquiry concerning Skanska’s actions. In Tennilä’s view it is not appropriate to recruit cheap labor for a state-run work-site, which is why the payer of the project should intervene in the matter.

”The wages Skanska will pay to the Estonians are in accordance with the Finnish collective labor agreement, even though the employees are working for the Estonian subsidiary Skanska EMV”, says Sakari Jämsä, the manager of Skanska’s Northern Finland regional unit.

”We are not willing to comment on any details relating to the HALTIK construction site, as that has been agreed upon in the contract documents”, he notes.

”The employees have been forbidden to speak about HALTIK”, confirms Pasi Heikkilä, Skanska’s chief shop steward in Rovaniemi.

Moreover, Skanska has not given its own employees any information of the HALTIK project, the construction of which is to begin within the next few weeks.

”Two Estonians came to Rovaniemi in the autumn in order to give us a hand, as the contract was lagging behind. We had to mend their work afterward, as the ceiling fillets were cracking”, Heikkilä reports.

According to Juha Hetemäki, the President of Skanska Finland, the recruitment of Estonian construction workers is a question of good building quality.

In an interview with the Finnish Broadcasting Company’s Lapland regional radio service, Hetemäki noted that the construction schedule is just four and a half months. In his opinion, it is not possible to find enough suitable labor for this project in Lapland.

”The arguments given by the management of Skanska are not watertight, as professional construction workers are certainly available in Lapland. This is the first time when a major nationwide construction company attempts to hire such a large number of foreign laborers for Lapland”, says Heimo Lahtela, the head of the Finnish Construction Trade Union’s office in Lapland.

Lahtela says that Skanska is causing turmoil on the competition and labour markets in Lapland, which are working successfully. Importing Estonian laborers cannot be profitable, as they should also be entitled to accommodation and per diems, Lahtela believes.

”The labor markets are already out of control in the Greater Helsinki area. Yesterday, two building entrepreneurs called me. They said that they would withdraw from the construction markets in Helsinki, claiming that it is not possible to run a profitable business in the capital region if employers have to pay salaries plus social security contributions in compliance with the labor agreement”, Lahtela continues.

Lahtela has heard that at some construction sites in Helsinki, Estonian workers sometimes have to pay back part of their wages. Sometimes, working hours are left unrecorded.

Some Estonians have also been intimidated by their employers.

Lahtela fears that such shady business practices could spread even to Lapland.

”When the government uses debt financing for economic stimulus it must mean that these funds are used to employ Finnish workers. The purpose cannot be to pump money into shady foreign businesses through a complicated chain of construction firms”, Lahtela insists.

The estimated number of foreign construction workers working in Finland is as high as 30,000. At the same time, there are some 14,000 jobless construction workers in Finland.

The underlying factor behind the flow of Estonian workers into Finland is the economic downturn in Estonia that has brought nearly all construction activities in the country to a halt.

Source: balticbusinessnews.com

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Greek Rescue Plan Still Stuck

Today focus will once again turn to the Ecofin meeting and a possible rescue plan for Greece. There have been speculations that a plan of a maximum of EUR 25 billion euro in loans an guaranties would be launched today. But according the German and the French ministers of finance, this will no be the case, DnB NOR Markets writes in a note to clients.

“However it seems as Mrs Lagarde is in general more positive towards a package.”

Knut A. Magnussen

“US retail sales surprised positively on Friday, while consumer confidence fell back somewhat. In the euro zone industrial production rose much more than anticipated. Today focus will turn to the Ecofin-meeting, while the highlight of the week is tomorrows FOMC meeting,” senior economist Knut A. Magnussen at DnB NOR Markets writes.

There were only minor movements in main stock markets Friday. US long rates fell somewhat in advance of the FOMC meeting tomorrow, while the euro gained vs the dollar.

The NOK stays strong and EURNOK is once again trading down toward 8.

US retail sales surprised on the upside in February with sales up 0.3% in total and by 0.8% exclusive of cars. The outcome was far stronger than expected and once again the effects of the cold winter have been smaller than feared. Hence there will probably be a positive contribution to GDP-growth from consumer demand also in Q1.

The flow of funds data (released Thursday) showed that the deleveraging is about to slow somewhat. The debt reduction was 1.2% in Q4 – the lowest reduction since Q3 2008.

It also seems as the savings is about to stabilize after having risen in the first half of last year. In the second half the savings ratio was fairly stable at around 4%.

Consumer confidence fell somewhat in March according to the preliminary data. It was the index for the present situation that fell most.

We probably have to see a more marked improvement in the labour market before confidence will pick up more significantly.

Today the Empire State index will be published along with industrial production and the NAHB index for the housing market. It is expected that the Empire state index will fall slightly and that production will rise slowly. The NAHB is however expected to stay at the very low level – in the light of the weak labour market.

Production data for the eurozone improved markedly in January.

The increase was 1.7% m/m, whereas production was expected to rise by 0.7%. Furthermore production was revised up significantly for December, from -1.7% to +0.6%.

Of the main countries Italy contributed most to the positive development, but growth was strong both in Germany and France as well. Production has now risen for eight months in a row but the level is still far below the pre-crises level. However, the trend is strong and business confidence points in direction of further gains in coming months.

The euro, which had started to appreciate before the release, continued to strengthen after the data.

Senior Economist Knut A. Magnussen

Today focus will once again turn to the Ecofin meeting and a possible rescue plan for Greece. There have been speculations that a plan of a maximum of 25 bill. Euro in loans an guaranties would be launched today.

However, according the German and the French ministers of finance (Schäuble and Lagarde), this will no be the case.

However it seems as Mrs Lagarde is in general more positive towards a package.

The euro has maintained its position over the weekend and is now trading around 1.3750 vs the dollar.

This week’s main event is the FOMC meeting scheduled for tomorrow.

At the previous meeting Mr. Hoenig dissented as he did not wanted to maintain the sentence indicating the interest rate would stay low for an “extended period-”

It seems reasonable that this topic will be discussed once again at the upcoming meeting. Nevertheless, we think that the sentence will not be changed at present. This is due to the development of the main indicators outlined by the Fed to be vital for monetary policy going forward: Capacity utilization, inflation and inflationary expectations.

The capacity utilization is still very low despite some improvement recently. Core inflation has declined somewhat (both the CPI and the PCE) and break-even inflationary expectations have also fallen somewhat from the previous meeting.

In Norway no more important data are to be released in advance for the rate meeting next week.

Today housing starts for January and foreign trade for February will be released.

Here’s a copy of today’s note from DnB NOR Markets.

Here’s DnB NOR’s current recommendations for stocks listed at Oslo Stock Exchange:

• Statoil



• Copeinca

• Cermaq

• Acergy

• Algeta

• Sparebanken Nord-Norge

• Telenor

Research note.

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E.U. Working On Greek Rescue Plan To Be Funded By Governments

E.U. To Reform Economic Policy

E.U. Defends Hedge Fund Plans after Geithner’s Warning

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