Germany says Nein and Ja

Marc To Market's picture

Germany appears to have capitulated.  The Bundesbank has dropped its opposition to extraordinary measures, like ending the sterilization of the SMP bond purchases, and has even dropped its visceral opposition to QE, if it can be structured properly to keep within the ECB's mandate.

As Jurgen Stark's recent op-ed piece in the Financial Times makes clear, this is not an endorsement of a new policy initiative.   The former ECB board member, who resigned over the Trichet's sovereign bond purchase scheme (SMP), argues against the need to take fresh initiatives. 

Stark argues that deflation in the euro area as a whole is unlikely and that no one is even forecasting it. Even the IMF, which is urging the ECB to take unorthodox measures, forecasts only Greece to experience deflation this year.  He offers the usual refrain that the drop in inflation is primarily driven by a decline in energy prices, and commodities more broadly, and the euro's appreciation. Stark also notes that past tax increases are dropping out of measures.  

Most of all Stark wants to draw a distinction between bad deflation and good deflation.  Bad deflation depresses consumption as people and businesses defer purchases, waiting for lower prices.  Good deflation is the relative price adjustments in the periphery to boost competitiveness.  

Stark warns against the official talk of the need for urgent action.  "With the economic recovery in the eurozone stabilising, and leading indicators pointing upwards, the most likely medium-term scenario is stable prices and a modest upturn over the next two years. No further action by the ECB is required."

Perhaps, investors and other observers get too caught up with rhetoric.  Many see Germany steadfast in its opposition to fresh initiatives and increasingly isolated.  However, look at what is happening on the ground suggests something different.   There are three separate developments that have gone largely unnoticed. 

First, German consumers are shopping.  In real terms, retail sales jumped 1.7% in January, the largest monthly rise since June 2011.   Real retail sales rose another 1.3% in February.  The back-to-back rise is the most in seven years.  The March report is due out April 27. 

Second, German wages are going up faster than inflation.  Last month, the more than two million public sector workers got a 3% wage increase and a 2.4% increase for next year.   Chemical workers struck a 14-month agreement that saw pay rise 3.7%.  Last year, IG Metall negotiated a 3.4% pay in increase in 2013 and a 2.2% increase this year.  Higher German wages mean that others may not have to squeeze wages down (unit labor costs) as much to restore competitiveness. 

Third, Germany is buying more from other eurozone countries.  In February, the latest data available, German imports from other eurozone countries are up 8.4% on a year-over-basis.  Overall German imports were up 6.5% from a year ago. 

We also note that the Bundesbank Target2 claims have been trending lower.  In March, the claims stood at 470 bln euros, the lowest level since late 2011.  This means that external imbalances within the euro area have been reduced in aggregate. 

Some observers are worried that the sanctions against Russia will take a toll on Germany.  Its exports to Russia were about 36 bln euros last year.  This is about 4% of German exports.  The ZEW survey did show a decline in investors confidence.  While the events in Ukraine and tension with Russia may not be helping matters much, the expectations component has fallen for four consecutive months after reaching a multi-year high at the end of 2013.    Moreover, the current assessment measure was not only stronger than expected, but stands at its best level since July 2011.

Germany is arguing against exaggerating the significance of low inflation, for which Stark teaches, the ECB does not target.  Additional that additional measures will likely be ineffective and counterproductive.  The last time that some the premiums that the periphery pays over Germany were this small, European officials were warning that the markets were mis-pricing risk.  How much lower do the advocates of QE want those premiums and yields to go? 

Moreover, there are positive developments in the German economy that are more promising for the euro area as a whole.  Under the rubric of German's ordo-liberalism, which (even) Draghi recognizes to be enshrined in the ECB, slow and steady wins the race. 

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Ifigenia's picture

 "The Bundesbank has dropped its opposition to extraordinary measures, like ending the sterilization of the SMP bond purchases, and has even dropped its visceral opposition to QE"


The german central Bank is probably right in opposing QE. Just look at the resuts of Bernake 4 trillions dollars QE or Japan Abenomic QE to understand it.


WhyWait's picture

Why I gave this a 2:

ZH readers should know better than to reason in terms of the category "Germany".  

The German industrialists, the Anglo-American controlled German Banks and the German people have very different and conflicting interests.  The German government's commitment to the US, NATO and the Empire, apparently ironclad, is under great strain. The continuing presence of US occupying forces 23 years after the end of the Cold War is easily forgotten on this side of the pond, but can't be forgotten there. And attitudes toward forcing a cutoff of Russian energy supplies or forcing Russia to leave the dollar economy and start demanding payment in Rubles, gold or Renbani could likewise be expected to depend on where in Germany you're sitting.

Ifigenia's picture

So the real cause behing Kiev coup d`etat by USA. Why couldnt USA accept the reality that The World is more than US 1% interests? Stop making wars and killing peoples.


Cygnus Nigri's picture

I think you mean Ja....

kurt's picture

I almost believe the Germans aren't lying their asses off.

falak pema's picture

I'd love to have Ghordius's views on this rivalry at the heart of the Euro construct : the Merkel Dictat vs the Draghi and Euro solidarity dictat. 

It seems that in the face of geo political turmoil (Ukraine spill over) and Banksta shenanigans, welded to the sovereign bond issues, the euro system has some very difficult choices; like bail-ins and concomittant Oligarchy roastings as well as bank toastings in the process. 

Germany has to decide, as these coming elections may cause the fall of Euro solidarity. Its now or never times. 

One thingie we don't hear much about, as its all opaque behind the curtain,  is the ongoing TAFTA negotiations behind the closed technocracy doors  to impose US Oligarchy rule in Euro zone. Awesome pipeline music. 

NotApplicable's picture

Every last thing you wrote is but an abstraction. Worse yet, mostly COLLECTIVE abstractions.

The reality of the actions of individuals is far more important than the smoke they blow up everyone's asses. Yet you think opinions about these fictions are important?


Ghordius's picture

the effects of the deeds of those "collective abstractions" are real. people die fighting for or against those "collective abstractions" every freaking day

yes, you can make the case that the EU, the IMF, the US, the various nation states and every corporation of this world are "collective abstractions"

nevertheless, you can't "wish them away" by declaring them so

falak pema's picture

SO the Merkel dictat of refusing to Eurobond is an abstraction? (that is not an individual decision but a collective decision of Germany's ruling body).

The Draghi counter punch to "do whatever it takes" to save sovereign bonds an abstraction? (That is not an individual decision but a compromise between the OTHER nations (including the FED)  and Germany to define the scope of ECB intervention which the German power cabal HAS to accept).

The "collective" power of the Eu bureaucracy an abstraction?

Seems to me that you're the guy blowing bubbles when you say : "actions of individuals" is far more important. 

The only action of individuals which is "far more important" has been Snowden and Wikileaks as contrarian plays against the Oligarchy collective mantra.

They, the Oligarchs, run the world collectively thru FED and Congress; ever more so since the crisis of Lehman began; that is not smoke and mirrors, friend, that is REALITY of our age.

Until the people do something collectively to fight it. Its people's COLLECTIVE might which will be required to bell the Oligarchy cats' cabal. 

Or...Democracy will die in first world. 

Ghordius's picture

Merkel is not the only european that resists EuroBonds. broadly speaking, the whole conservative consensus in Germany, France and Italy is that the moment we have EuroBonds, the Nation States have to merge their militaries, and cease to be sovereign. to which the answer is a No, thanks

the excellent article from Marc points in the right direction: ordo-liberalism

which is liberalism (euro-style) with a hat-tip to the sensibilities of conservativism (euro-style, including attachment to the nation-states) and socialism

my take is that this Draghi-Merkel thing is not really correct: it's our federalists (mostly on the left) and the megabanks that wish for eurobonds

Confused's picture

Forgive the ignorance, but I'm not familiar with TAFTA in terms of what the ultimate downside is. I get the 'idea' of free trade agreements. I also understand that there are some nasty things that come along with it. But at the moment I can't seem to see the negative direction this might take. Any thoughts would be appreciated. 

Uncle Remus's picture

All your anything and everything belong to us. - banksters

Ifigenia's picture

is this the price for Ukraine crisis that German pay to have support in EU? Germany go down Europe go down. USA know.

ebworthen's picture

Germany has adopted the "I'll gladly pay you Tuesday for a hamburger today" philosophy.

Bullish for Wimpy, not so much for hamburger vendors.

NotApplicable's picture

"...if it can be structured properly to keep within the ECB's mandate."

WTF is with all of the stupidity in contributed articles today?????

I'm so tired of people treating smoke and mirrors as if they represent anything tangible.

The ECB itself isn't a tangible entity, let alone it's supposed "mandate."

Both are nothing but cloaks for the INDIVIDUALS operating for their own benefit.

Honestly, this shit isn't that hard.

Ghordius's picture

the ECB is a confederation of national banks from 18 european nations. the effects of it's monetary policy are tangible. and no, for good or bad it is a "group effort"

are you sure you aren't taking your individualistic perspective so far that you don't see anymore the realities of our world?