Group 11: Mariela Tinajero, William Larson, Eric Schenk
MBA 6410
Professor Doris Geide-Stevenson
Country Report Germany
For this project you will analyze a report written by the Economist Intelligence Unit, a
commercial source for country reports, and update this report with some additional information
from other sources. Briefly check out the EIU website describing their 'country intelligence'
services. The Projects Learning Module contains a country report on Germany from September
2009 and July 2010. Also, use chapters 1 and 2 from the IMF World Economic Outlook
published in April 2010 (see readings for Week 0).
Part I:
Answer the following questions about the country report. Make sure you define key terms and
indicate what type of data you consulted in the report in order to come up with your answers.
Please carefully read the country report.
1. Compare the relative importance of the spending components C, I, G, EX (Exports) and IM
(Imports) for the US and Germany. Which spending components have contributed the most to
Germany's real GDP growth? Compare the economic forecast for GDP growth from the country
report from July 2010 with more recent data (e.g. from dismalscientist.com).
According to the Economist Intelligence Unit, Germany’s private consumption in
2009 was € bn 1,248.7 and it forecast that in 2010 it will be € bn 1,233.8 . As for public
consumption in other words government consumption it was formulated to be € bn 433.4
in 2009 and an estimation of € bn 445.5 in 2010. Investment was € bn 426.4 in 2009 and
the estimation for 2010 was € bn 420.1 . Finally, net exports were equal to € bn 86.9 in
2009 and estimated to be € bn 91.9 in 2010. It’s important to notice that the Economist
Intelligence Unit also takes into account the stockbuilding also known as inventories (V)
which were -€ bn 39.1 in 2009 and were estimated to be -€ bn 11.0 in 2010 (The
Economist Intelligence Unit Limited, 2010).
So that real GPD in this case is equal to C+I+G+NX+V this equates to a real GDP
of € bn 2,162.0 in 2009 and an estimate of € bn 2,187.0 in 2010. So by comparing 2009
and 2010 a formulation of the percent each component influences real GDP can be
surmised. This can be formulated by dividing each component of real GDP by all the
components of the real GDP in a given year. So for 2009 consumption contributed
1,248.7/2,162.0 = 57.8%, government consumption 433.4/2,162.0 = 20.0%, investment
426.4/2,162.0 = 19.7%, inventories 39.1/2,162.0 = 1.8%, and net exports 86.9/2,162.0 =
4.0%. In a similar fashion the estimates for the contribution in each component for 2010
is 56.4% for consumption, 20.4% for government consumption, 19.2% for investment,
0.5% for inventories, and 4.2% for net exports. The following pie charts give a great
visual.
2009
2010
Consumption
Consumption
Government
Consumption
Government
Consumption
Investment
Investment
Net Exports
Net Exports
Inventories
Inventories
The pie charts show that the components relatively stayed the same from 2009 to
2010. Most importantly they show that consumption is the greatest part of real GDP,
followed by either government consumption or investment, followed by net exports, and
lastly inventories which seem to hardly to take a part of real GDP. However, there is a
difference between what constitutes the percentage of components to the real GDP and
the actual components that help grow real GDP as shown below.
real GDP growth movers
80.00%
60.00%
40.00%
20.00%
Percent
2009
0.00%
2010
-20.00%
Change
-40.00%
-60.00%
-80.00%
Components
For 2010 the component that influenced the greatest growth in real GDP
according to Economist Intelligence Unit is inventories. It may seem contradictory
according to the graph, that show negative change, but low inventories are better for real
GDP then high because they take away from real GDP instead of adding. So a high
negative change in inventories is actually a positive that helps grow real GDP because it
says there is less inventory stocked. Net exports seem to have the next highest growth
since it is positive change it influences real GDP positively, then follows government
consumption because it went up and has a positive change. The last two are practically
the same and for 2010 consumption and investment actually hindered real GDP growth as
they had negative change meaning they went down, which means less output.
Comparing the information to what is found in dismal scientist is relatively the
same. For example adding all the percent changes for a year ago and dividing by four for
the four quarters, in Dismal Scientist, in other words taking the average of the percent
changes for a year ago for the given year. So taking the formula and applying it to
government consumption in 2008 under Dismal Scientist yields 2.0%. This number is
equal to the same number given by the Economist Intelligence Unit for public
consumption or government consumption in percent change from year to year. Every
number can be calculated the same way and every number is about equal giving rounding
differences for 2008 and 2009 from both Economist Intelligence Unit and Dismal
Scientist.
However, for 2010 the rules no longer apply since both Dismal Scientist and the
Economist Intelligence Unit both begin to forecast and aren’t actually dealing in the
actual real GDP. Dismal Scientist forecasts 1.9% real GDP growth rate, while the
Economist Intelligence Unit shows 1.2% (Moody's Analytics, Inc., 2010) (The
Economist Intelligence Unit Limited, 2010). However, Dismal Scientist may have a
better estimation than the Economist Intelligence Unit because they posted their article in
July while Dismal Scientist updated their website in late August with the latest
information from quarter two of 2010. Dismal Scientist says percent change for 2010 for
consumption will be -0.2%, for government consumption 3.0%, for investment 4.3%, for
inventories -2.1% contribution to real GDP, for exports 14.9%, and for imports 13.3%.
While the Economist Intelligence Unit says percent change for 2010 for consumption will
be -1.2%, for government consumption 2.8%, for investment -1.5%, for inventories 0.1% contribution to real GDP, for exports 6.8%, and for imports 6.9%.
In summary the Economist Intelligence Unit believes that real GDP will be lower
than that forecasted by Dismal Scientist. They forecasted that consumption would
decrease by a greater amount then Dismal Scientist, government consumption would
grow just slightly less than Dismal Scientist, investment would decrease instead of
increase compared to Dismal Scientist, inventories contribution would continue to
decrease but by less then Dismal, and that exports and imports would increase but not as
much as predicted Dismal Scientist. So in general because the Economist Intelligence
Unit predicted slightly less on everything they got a lesser real GDP growth rate then did
Dismal Scientist.
2. Did Germany (not the Euro area as a whole) undergo a period of deflation during the time
period covered by the country report? Find appropriate data from the country reports to make
your argument.
Germany did go through a period of deflation according to the Economist Intelligence
Unit. Page 18 shows the exchange rate in $/€ and ¥/€ (European Central Bank
Eurosystem, 2010).
Exchange rate $/€ (end-period)
Exchange rate ¥/€ (end-period)
2005
1.18
139.12
2006
1.32
157.07
2007
1.46
163.13
2008
1.39
126.21
2009
1.43
133.4
2010
1.19
111.27
2011
1.19
110.67
From the table above it can be examined that from 2006 to 2007 the euro in
Germany could buy more dollars and yen before it decreased in 2008. It must be noted
that 2005 is not included because the information on the table does not include before
2005; in order to examine if the euro could purchase more dollars and yen in 2005. The
same pattern could be seen for a shorter period in 2009, were the German euro could
purchase more US dollars and yen then in 2008 or the estimation of 2010. So if Germany
can purchase more dollars and yen per euro this means that the value of their money is
more valuable which equates to deflation. Deflation is essentially a drop in price levels
which allow you to purchase more goods so the value of money increases. This is what
was seen in Germany in 2006, 2007, and 2009.
3. How does the ECB conduct monetary policy? Show the parallels to the monetary policy
conducted by the Federal Reserve Bank.
The ECB has lowered the refinancing rate to 1% and deposit rates to 0.25%.
These rates have remained the same for more than a year. These measures are expected to
increase in the near future. They have also loosened credit restrictions for bankers, as
well as offered “unlimited short-term refinancing.” They have begun to purchase euro
denominated bonds in the area, and plan to sell other assets to compensate for the debt it
incurs in purchases, in order to monitor inflation (The Economist Intelligence Unit
Limited, 2010).
The Federal Reserve is not much different than the ECB in its monetary policy.
Both try to influence the economy in a positive way. Both use tools such as credit,
interest, and the availability of money (The Federal Reserve Board, 2009) (European
Central Bank Eurosystem, 2010). Most importantly they both rely heavily on interest, and
buying and selling securities to influence inflation. Both try to purchase securities to get
money out to the market, and buy securities to remove money from the market. By
buying and selling these securities they are able to influence inflation by manipulating
how much money is out in the market.
4. Describe Germany's external position. What was the trade balance (goods and services) in
2008 and 2009? What are Germany's major trade partners? What was Germany's current account
position? As a % of Germany's GDP how large are the trade and current account balances? How
does this compare to the United States? Historically, how typical are these external positions for
either country?
Germany’s account surplus has fallen as exports have dropped while imports have
increased. The account surplus is expected to fall further but stand high in accordance
with GDP. The trade balance in Germany in 2008 was 256 in billions of dollars, and in
2009 it was 188 in billions of dollars. Germany’s major trade partners in imports include
the Netherlands (8.8%), France (8.2%), China (7.3%), US (5.6%), Italy (5.6%), UK
(5.4%), Belgium (4.9%), and Others (54.2%). Germany’s major trade partners in exports
include France (9.7%), US (7.2%), UK (6.7%), Netherlands (6.6%), Italy (6.4%),
Belgium (5.2%), China (3.4%), and Others (54.8%). Their current account balance in
2008 was a surplus of 246.1 in billions of dollars which lowered in 2009 to 168 in
billions of dollars. In other words their percent of GDP for the current account balance in
2008 was 6.7% but it dropped to 5% in 2009 which is drop of 1.7%. The trade balance on
the other hand in percent GDP in 2008 was 7.2% and in 2009 was 5.6% (European
Central Bank Eurosystem, 2010).
The current account balance in the US has basically been negative since 1982 it
was positive for a while in the first two quarters of 1991 (Moody's Analytics, Inc., 2010).
The US trade balance has also been negative since it was calculated in 1992 (Moody's
Analytics, Inc., 2010). Germany’s trade balance has been positive in this decade
according to Dismal Scientist (Moody's Analytics, Inc., 2010). As for Germany’s current
account balance it has fluctuated every decade since the 1970’s. It seems that in the
1970’s the current account balance was fairly close to 0 but then it went up in the 1980’s
went down into the negatives in the 1990’s and up again into the positives in the 2000’s
(Deutsche Bundesbank, 2010). The chart below shows a graphical example of Germany’s
current account balance. Historically the US is has always been a debtor for four decades
that have been recorded while Germany tends to be a debtor about 25% of the time for
four decades. However, there isn’t sufficient data to accurately say how often these two
countries are debtors but given the last four decades the data holds. So given the data it
seems that for the most part currently the positions the US and Germany hold for trade
balance and current accounts seem fairly typical.
Germanys Current Account Balance
60
50
40
30
€ bn 20
Current Account
Balance
10
-10
-20
1971-01
1973-10
1976-07
1979-04
1982-01
1984-10
1987-07
1990-04
1993-01
1995-10
1998-07
2001-04
2004-01
2006-10
2009-07
0
Year:Quater(Month)
5. Define and explain the role of automatic stabilizers for the German economy.
Automatic stabilizers are measures that automatically restrain the big fluctuations
in GDP without the express action from the government. Changes will happen
automatically with regards to government spending and taxes. For example governments
tend to go into deficits and decrease taxes in recessions. While in good times they
increase taxes and decrease government spending.
For Germany this has meant that the government of Germany has increased its
deficit because of the recession of 2008-2009. The governments went into a deficit in
2009 at about 3.3% of GDP and it is expected to increase to 5.2% this year. However, it
is expected to decrease in 2011 as Germany’s economy recovers and its government
implements policy to reduce spending. Germany also has plans on increasing taxes again
in the near future. Germany’s parties can be seen in arms in regards to taxes, whether
they should continue tax cuts or increase taxes on the wealthy. However, tax cuts could
not be kept in place as the government deficit increased in 2011. It seems that as the
economy recovers taxes will go up again (The Economist Intelligence Unit Limited,
2010).
6. Describe the macroeconomic stabilization policies that Germany recently put into effect.
Analyze the impact of these policies with the help of the IS/LM framework.
The German stimulus increased government spending, decreased taxes and instituted a
new lending program in the German state-owned bank to increase liquidity (Chambers, 2008).
The increase in liquidity is meant to counteract the leftward shift of the LM curve in the IS/LM
framework, caused by the credit shock. Government spending works on the IS curve to increase
demand. The increase in government spending has a multiplier effect as people spend a portion
of the additional income from the increase in government spending. Some of the government
spending went toward infrastructure projects such as transportation and renovation of buildings
to reduce CO2 emissions. To improve conditions locally Germany has made funds available to
local governments to boost regional economies and weak local authorities. Some government
spending is aimed at individuals, with tax credits for homeowners to repair and modernize their
homes. There are also extensions of programs for older employees with few qualifications and
increases in the length of time part-time workers can claim benefits.
In addition to the increase in government spending Germany has decreased taxes. A
decrease in taxes also shifts the IS curve right, with the increase in disposable income increasing
spending. Some of the methods used to decrease taxes include accelerated depreciation and
write-down of assets. In order to increase demand for automobiles new cars could be purchased
tax free with additional incentives for automobiles which have low emissions. This increased the
demand for new automobiles, which is a large portion of the German economy.
The tightening of credit markets left many small businesses without access to funds. The
German government has attempted to counter this with policy changes at state owned banks to
increase lending to small businesses. The changes in the state owned bank lending programs are
meant to increase funds available to support small business (Chambers, 2008).
Part II:
Update and expand the country report by finding more current information on the
German economy. The Economist frequently covers Germany and the Euro area. Also, rely on
the data and analysis from the Dismal Scientist.
1. Consider the concept of the Genuine Progress Indicator and per capita real GDP. How does
the standard of living in the U.S. compare to the standard of living in Germany according to the
two different measures? Find evidence to make your arguments. One source could be Clive
Crook's article "U.S. versus Europe: No Winner".
When using GDP to measure the standard of living the U.S. is the clear winner. The
GDP of the U.S. is higher than Germany, but there are several problems with using GDP to
measure the standard of living. Gylfason uses data of physical stature to show that reduced
inequalities in the U.S. could show in the physical stature, as Europeans under twenty are taller
than their American counterparts (2007). This relationship is reversing the trend in the
population of sixty year olds, where Europeans are on average shorter than Americans.
There is little productivity difference between the U.S. and European countries. The
difference in GDP comes from U.S. workers working more hours, while also enjoying less
leisure time. Talberth uses the Genuine Progress Indicator to summarize that GDP is
oversimplified, and not a true measure of the standard of living (2007). He cites examples where
increasing environmental degradation and crime both increase GDP, although they clearly would
not raise the standard of living. In evaluating factors which effect GDP it can be difficult to
determine if the factor increases or decreases the standard of living. The most prominent
difference between the U.S. and Germany is that Americans work more hours, and continue
working later in life. Because the rational for working differs between individuals there is no
clear answer as to who is better off (Cook, 2010). People learn from the experience of others,
and so can nations. Determining a winner is not as important as learning and progressing with
both countries learning from the mistakes and successes of the other.
2. For the years 2006 through 2010, track the value of the Euro versus the US$. To track the
nominal exchange rate you can use an online currency converter like OANDA (the currency site)
or the currency converter on the Yahoo finance page. Graph the development of the currency
over time. See the resource page for more foreign exchange sites. What was the impact of the
Greek crisis on the value of the euro? Can you explain this development in light of the exchange
rate theories developed in class.
US Dollars per Euro
0.9
0.8
0.7
0.6
1/1/2006
1/1/2007
1/1/2008
1/1/2009
1/1/2010
(Historical Exchange Rates, 2010)
In late 2008 and early 2009 there was a possibility some Euro member nations could default on
their debts. Greece was the country considered most likely to default as it was unable to raise
money to pay for its current government expenditures. This caused a fall in the Euro or a
strengthening of the dollar, as shown in the above figure. The majority of the change was due to
the increase in uncertainty in the repayment of debts. In the Feenstra and Taylor readings we see
that there is a cost to risk which should increase the nominal rate. The increase in uncertainty
causes the risk of investing in the Euro to increase, and a risk adverse person may choose a lower
nominal return in exchange for less risk. The increase risk of default by Greece decreased the
demand for Euros. Because the dollar is a substitute for the Euro, this increased the quantity of
dollars demanded. So the increase in the number of people selling Euros to buy dollars
weakened the Euro and strengthened the dollar.
Also, track the U.S. and Euro area inflation information for the years 2006 - 10 . Briefly explain
how inflation is measured in the two countries - try to use similar price indices in both countries
for your comparison and discuss possible differences in these indices. Information for both
economies can be found in dismalscientist.com.
Monthly Percentage Change in CPI
1.5
1
0.5
0
-0.5
-1
-1.5
-2
Jan 06
Jul 06
Feb 07
Aug 07
Mar 08
Germany CPI
Sep 08
Apr 09
Nov 09
May 10
U.S. CPI
I gathered the CPI for Germany and the United States. Inflation in the United States appears to
be more erratic than Germany; with most of the high and low points over a given period of time
occur in the United States with a small variance between countries. The CPI is measured using a
basket of goods purchased by a typical consumer. Because the typical consumer in the U.S. is
different from a consumer in Germany, the basket of goods used to measure CPI changes. Both
are measurements of consumer prices, so differences between the two countries changes should
be differences in national inflation for consumers.
3. Use the data from 2. to figure out what happened to the real exchange rate in 2006 - 2010.
Explain the concept of a real exchange rate based on class readings. Other things constant, what
will be the impact of this real exchange rate movement on U.S. net exports and German net
exports? Explain.
The real exchange rate is the amount of goods one nation’s goods and services will
purchase in foreign nation’s goods and services. Both economies have low inflation with similar
patterns with few outliers when inflation moves outside of a narrow band. Thus any change in
the nominal exchange rate is equivalent to a change in the real exchange rate. During the first
two and a half years the real exchange rate was falling for the United States. In Late 2008 the
real exchange rate reversed its course and the dollar strengthened. The weakening of the U.S.
dollar from 2006 to mid-2008 made U.S. products relatively less expensive. This increases the
demand in Europe for U.S. made goods because of the lower price, while decreasing the demand
for European good in the U.S. because imports from Europe cost more. Beginning in late 2008
this trend reversed making U.S. goods more expensive in comparison to European goods.
4. Explain the major factors that caused the Germany economy to fall into a recession during
2008. Rank the factors according to their importance and provide evidence.
Percent change over
previous quarter
Real Germany GDP, Chain-linked
08Q2 08Q1 07Q4 07Q3 07Q2
Private Consumption
-0.5
-0.1
0
0.2
0.7
Construction Capital Formation
-3.5
5.5
0.4
0.6
-3.5
Exports of Goods and Services
-0.2
2.5
1.3
1.7
Table showing percentage change of GDP variables as Germany entered the
recession in the Second quarter of 2008 (Ahmed, 2009).
1.4
1. Credit conditions tighten.
The German economy was affected by a financial system shock which decreased
lending worldwide. This decreased external demand for goods, which lead to a
decrease in exports. The financial shock also caused increased delinquencies,
which increased the amount bad loans banks had to write off. Because this
negatively affects bank’s balance sheets, it will take some time for a recovery to
take hold (Germany: External shock, 2009). There are also problems associated
with an extended recession causing a downward spiral as Bank loans go bad
because firms don’t have access to capital. As more companies default on loans it
further weakens bank balance sheets.
2. Exports of Goods and Services
Most of Germany’s recent growth has come from the increase in exports. During
the recession demand for exports, and more specifically durable goods decreased
(Monthly review, 2008). This decrease in exports reduced national income, and
output decreased in response to demand. Because of German reliance on exports,
the decrease in global demand should have a larger impact on GDP than countries
where net exports are a smaller portion of GDP (Germany: External shock, 2009).
3. Construction Capital Formation:
German private home prices decreased as demand dropped off during the
recession (Monthly review, 2008). The housing market had rebounded in 2006
and 2007 from a long period of weakness (Monthly review, 2008). In the data in
the table above you can see that there was an increase in the first quarter of 2008
of 5.5% followed the next month by a 3.5 percent decrease equal to a change of
9% swing in the contribution to GDP in a quarter.
4. Private Consumption:
As the credit market tightens and unemployment increased, consumers were
under more pressure to save. This leads to a reduction in consumption, which
reduces GDP.
5. In terms of the impact of the latest recession on the labor market, how does German compare
with the United States? Use the most current data available to make your comparison.
Employment Situation, SA
Apr 09
Mar 09
Feb 09
Jan 09
Dec 08
Nov 08
Oct 08
Sep 08
Payroll change, ths.
-539
-699
-681
-741
-681
-597
-380
-321
Unemployment Rate, %
8.9
8.5
8.1
7.6
7.2
6.8
6.6
6.2
Average hourly earnings, % chg. mo.
ago
0.1
0.2
0.2
0.2
0.3
0.3
0.4
0.2
Average weekly hours, % chg. mo. ago
0.0
-0.3
0.0
0.0
-0.3
-0.3
-0.3
-0.3
-167.0
-172.0
-262.0
-180.0
-121.0
-119.0
-65.0
28.2
20.3
20.8
22.1
20.5
27.1
33.0
34.7
Aggregate weekly hours, % chg. mo. ago -0.6
-1.0
-0.6
-0.7
-0.9
-0.9
-0.8
-0.6
65.8
65.5
65.6
65.5
65.7
65.8
66.0
66.0
Manufacturing employment change, ths. -149.0
1-month diffusion index
Labor force participation rate, %
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: Bureau of Labor Statistics
United States: Employment Situation. http://www.economy.com/dismal/pro/release.asp?rk=1CC52669-5C04-4849-B4B4-3BC12DD3A6D3.
Germany Employment Situation (SA)
Jul 09
Jun 09
May 09
Apr 09
Mar 09
Feb 09
Jan 09
Dec 08
8.3
8.3
8.2
8.3
8.1
8.0
7.8
7.7
West Germany
7.0
7.0
7.0
7.0
6.8
6.7
6.5
6.4
East Germany
13.1
13.2
13.2
13.2
13.2
13.0
12.9
12.8
Unemployment Rate (%)
3,480.0
3,486.0
3,459.0
3,455.0
3,396.0
3,330.0
3,286.0
3,226.0
% change month ago
-0.2
0.8
0.1
1.7
2.0
1.3
1.9
1.3
% change year ago
7.6
7.6
5.1
5.0
2.4
-1.6
-4.7
-8.5
Unemployment, ths
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: Bundesbank
Germany: Employment Situation. http://www.economy.com/dismal/pro/release.asp?rk=B2C6A8AD-6D08-49AB-935B-BB15FDBC100B.
The two charts above illustrate that both economies did see an impact throughout the
recession on unemployment. They are different, however, in the total impact experienced
in the respective economies. The U.S. has experienced steady growth in unemployment
rates since early 2008. As the chart illustrates above the German Labor market also
experienced increases in unemployment, but at much smaller and more consistent levels.
The biggest difference in the two countries is the direction of fiscal policy.
The German government stepped in and introduced subsidy programs to encourage
employers to reduce the hours of workers rather than laying them off and increasing the
unemployment market. By most measures this approach appears to be effective for
Germany. Unemployment is still falling and Germany is approaching levels of
unemployment seen prior to the recession much faster than many economists predicted.
When compared to other major European economies this is even more significant.
(Blackstone) The program was expensive, however, as the EUI contributes the majority
of the budget deficit to work subsidies. As the country shifts to aim fiscal policy at
controlling the budget deficit, they will have to use caution to prevent another slip in the
near future. (The Economist Intelligence Unit Limited, 2010)
Employment Situation, SA
Sep 10
Aug 10
Jul 10
Jun 10
May 10
Apr 10
Mar 10
Feb 10
-95
-57
-66
-175
432
313
208
39
-73
-99
64
190
318
187
87
-19
Goods-producing
-22
10
37
1
21
67
57
-28
Services
-73
-67
-103
-176
411
246
151
67
Private
64
93
117
61
51
241
158
62
0.1
0.3
0.1
0.1
0.3
0.3
-0.1
0.1
Establishment survey
Nonfarm payrolls, change, ths
3-mo MA
Industry detail
Average hourly earnings, % change
Average workweek, hrs
33.5
33.5
33.4
33.4
33.5
33.4
33.3
33.2
Index of aggregate weekly hours
99.6
99.5
99.2
99.1
99.3
99.0
98.5
98.0
1-mo diffusion index
49.8
54.1
57.2
53.7
56.1
68.0
60.4
57.4
Unemployment rate, %
9.6
9.6
9.5
9.5
9.7
9.9
9.7
9.7
Labor force, change, ths
48
550
-181
-652
-322
805
398
342
Labor force participation rate, %
64.7
64.7
64.6
64.7
65.0
65.2
64.9
64.8
Household survey
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: Bureau of Labor Statistics
United States: Employment Situation. http://www.economy.com/dismal/pro/release.asp?r=usa_employ.
The U.S. on the other hand is still facing near double digit unemployment as employers
are reluctant to hire with more uncertainty on the horizon. The lack of hiring is
surprising to some considering the large amount of cash and profits residing on
corporations financial statements. The consumer ultimately needs to begin spending
again to further incentivize employers to hire again. Consumers, however, are worried
about staying employed and restructuring their personal finances. Ultimately it appears
that we have a stalemate where neither party is ready to make the first move. (Hiring
2010)
When you compare the two situations, Germany’s approach perhaps limited the potential
for a stalemate between employer and consumer considering the employee never left the
building, but it may just be delaying the inevitable as German companies look to
restructure to compete with American firms who perceivable found new efficiencies in
the workforce.
6. Did Germany undergo a housing bubble before the recession of 2008? In how far was the
German banking industry involved with real estate financing? Why is financial regulatory reform
such a high priority for the German government?
Germany is one of the few countries that did not experience a housing bubble through the
recession. Prices of homes remained relatively stable throughout the years leading up to
the recession and have continued to do so. (Charlotte) The EIU article confirms this by
indicating that households have strong balance sheets that have helped maintain relatively
strong consumer demand. (The Economist Intelligence Unit Limited, 2010)
Surprise House Price Increase in Germany. February 20, 2009. http://www.globalpropertyguide.com/Europe/Germany/Price-History.
This doesn’t necessarily mean that the financial crisis experienced by the German banks
was not due to housing bubbles and real estate financing, however. The cause was just
not the burst of domestic bubbles, but was much more connected to foreign investments
that were backed by mortgages in the international markets. The Organization for
Economic Cooperation and Development (OECD) outlined three primary causes of the
banking crisis in Germany, including the role of Landesbanken, low profitability and
capitalization of German banks, and severe shortcomings in banking supervision.
(Anonymous)
Landesbanken, largely due to a compromised business model, experienced severe writedowns on toxic assets as foreign investments collapsed in the wake of the recession. The
domestic competition was a large component that pushed Landesbanken to begin
investing in foreign markets along with a decrease in government guarantees. The
collapse of the Lehman Brothers and others created circumstances that required a great
amount of support from the German government in the form of large bailouts.
(Anonymous)
As the banking industry has begun to transition through its reformation process, oversight
and supervision have been a very high priority. Recent regulation has been put in place
in recent months to strengthen the power of supervisory institutions. Also, quantitative
measures have increased requiring higher capital ratios and other financial measures.
Dealing with toxic assets will also be a concern as accounting standards adjust to provide
better transparency in the international markets. By making these and other changes in
the banking system, Germany hopes to regain confidence in its financial institutions.
Hopefully the stress tests mentioned in the EIU article will identify where progress has
been made and also identify future areas of concern. (The Economist Intelligence Unit
Limited, 2010)
7. What is Germany's role in the context of the Greek crisis. Briefly outline the crisis in Greece
and show the connection to the German economy. Can you see any analogies between the
relationship of Germany/Greece versus the United States/China? Explain.
Greece GDP
10Q2
10Q1
09Q4
09Q3
09Q2
09Q1
08Q4
08Q3
Real, million 2000 EUR
43,904
44,689
45,040
45,393
45,609
45,747
46,216
46,539
% change quarter ago
-1.8
-0.8
-0.8
-0.5
-0.3
-1.0
-0.7
0.1
% change year ago
-3.7
-2.3
-2.5
-2.5
-1.9
-1.0
0.7
1.9
Final Consumption
39,034
40,882
41,422
41,363
41,126
41,213
41,293
41,229
-5.1
-0.8
0.3
0.3
0.0
0.8
1.1
1.7
6,647
7,861
7,903
8,239
8,162
9,206
9,760
9,670
-18.6
-14.6
-19.0
-14.8
-16.6
-5.2
-1.3
-9.8
8,676
9,097
9,378
8,781
9,133
9,145
11,104
10,951
-5.0
-0.5
-15.5
-19.8
-19.0
-17.9
0.8
-0.4
12,485
14,155
13,560
13,548
14,430
15,150
16,544
16,164
-13.5
-6.6
-18.0
-16.2
-12.4
-10.0
-1.2
-2.0
% change year ago
Investments
% change year ago
Total Exports
% change year ago
Total Imports
% change year ago
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: Statistics Greece
Greece: GDP. http://www.economy.com/dismal/pro/release.asp?r=grc_gdp.
The Greek crisis really begins with the information listed above. Considering net
exports, you quickly see that the current trade balance is negative. In 2008, net exports
reached -14.6% of GDP. (Global Prospects) This indicates that the country spends more
than it produces, which ultimately indicates that the country is borrowing money to
support its spending. At the root of the problem is really the amount of money the
government was borrowing to keep the country afloat. As GDP began to shrink in the
wake of the global recession, Greece found itself on the brink of being unable to satisfy
its debt requirements. Sovereign insolvency occurs when a government is unable to
satisfy their debts.
The increasing skepticism of Greece’s ability to satisfy its debt eventually had an impact
on the bond market. With a decrease in demand from unwilling investors, bond yields
continued to climb and eventually reached a point where Greece was uncertain it would
be able to meet its 2010 borrowing requirements. Total debt for the country is estimated
to be at least 115% of GDP. (Greece)
Germany and several other EU nations found themselves on the other side of the
equation. Germany is a country that is high in exports and over time they have loaned a
significant amount of money to Greece and these receivables (bonds) reside on financial
institution’s balance sheets. With Greece facing bankruptcy, the EU recently issued a
$141 billion bailout for the Greek government of which Germany will contribute $28
billion. (Edward)
Why is it in Germany and the EU’s best interest to provide the funds and bailout a
seemingly dysfunctional economy? As mentioned previously Germany and other
European nations have loaned Greece a significant amount of money. If Greece declares
bankruptcy this debt becomes compromised. This potentially starts a chain reaction
within the EU as other countries will likely become unable to satisfy their debts.
Financial institutions will once again take a step back as they write down assets. (Global
Prospects) Germany also benefits in the currency markets with Greece being around. On
a stand-alone basis, high exports and high savings will generally strengthen exchange
rates and reduce a countries ability to export as it becomes more expensive for countries
to buy your products. As a member of the EU, countries such as Greece offset some of
these pressures, which is beneficial in allowing Germany to continue to export at high
levels.
Current Account, bil $
Current account balance
Goods and services
10Q2
10Q1
09Q4
09Q3
09Q2
09Q1
08Q4
08Q3
-123.3
-109.2
-100.9
-97.5
-84.4
-95.6
-147.6
-172.4
-131.6
-114.5
-104.7
-99.3
-80.4
-90.4
-144.3
-187.6
Investment income balance 41.2
Other
% of nominal GDP
40.2
35.1
35.5
26.3
24.6
25.8
45.4
-32.9
-34.9
-31.3
-33.6
-30.3
-29.7
-29.2
-30.2
3.4
3.0
2.8
2.8
2.4
2.7
4.2
4.8
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: Bureau of Economic Analysis
United States: Current Account. http://www.economy.com/dismal/pro/release.asp?edition=1&r=usa_bop.
Treasury Budget, bil $
Nov 09
Oct 09
Sep 09
Aug 09
Jul 09
Jun 09
May 09
Apr 09
Total Receipts
133.6
135.3
218.9
145.5
151.5
215.4
117.2
266.2
Total Outlays
253.9
311.7
265.5
249.1
332.2
309.7
306.9
287.1
Total Surplus/Deficit
-120.3
-176.4
-46.6
-103.6
-180.7
-94.3
-189.7
-20.9
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: U.S. Department of Treasury
United States: Treasury Budget. http://www.economy.com/dismal/pro/release.asp?rk=1523D00B-D0D0-4D9F-BB35-A989424B6295.
The two charts above indicate that the U.S. is similar to Greece in the fact that it carries a
negative current account balance (deficit) and treasury budget deficit. The U.S. spends
more than it produces domestically and thus has to borrow. China is really the equivalent
of Germany considering that they export a substantial amount of goods to the U.S. and
effectively loan the U.S. money. Should the U.S. find itself facing bankruptcy, China
would face the same dilemma as Germany. It would arguably be in China’s best interest
to act in a similar fashion and bailout the U.S. government and protect their investment in
the U.S. dollar as well as sustain their GDP contribution provided by net exports.
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD
Jul
Jun May Apr Mar Feb Jan
Country
2010 2010 2010 2010 2010 2010 2010
------ ------ ------ ------ ------ ------ -----China, Mainland
846.7 843.7 867.7 900.2 895.2 877.5 889.0 Japan
821.0 803.6 786.7
795.5 784.9 768.5 765.4 United Kingdom 2/ 374.3 362.2 350.0 321.2 279.0 233.5 208.3 Oil
Exporters 3/
223.8 223.0 235.1 239.3 229.5 218.8 218.4 Brazil
162.2 158.4 161.4 164.3
164.4 170.8 169.1
http://www.ustreas.gov/tic/mfh.txt
Concern does exist that investors will reach a state where they question the U.S. ability to
satisfy the debt. If that happens and demand drops, bond yield rates will rise and the U.S.
could find itself struggling to manage its debt. It does have some advantages over
Greece, however, in their ability to create dollars and also allow the currency to fluctuate
in the open market. (Wind)
8. Evaluate Germany's attempts to reduce the budget deficit in terms of short-run and long-run
macroeconomic effects. Describe the German stance on fiscal policy in the current climate.
Should the U.S. emulate the German strategy?
Overall Germany is attempting to reduce the budget deficit over the next several years in
gradual increments. The goal is to reduce spending by 80 billion Euros over the next four
years, which means a decrease in the deficit, respectively, of 0.5%, 0.8%, 1%, and 1%
between 2011 and 2014. (The Economist Intelligence Unit Limited, 2010) Historically
Germany has maintained a budget surplus, but recent attempts to combat the recession,
primarily through automatic stabilizers such as short-time working subsidies. In the
short-run Germany must be cautious not to cut back too much too fast, which would
potentially send the economy back into a recession. As the economy stabilizes,
inflationary pressures may have to be managed.
Germany has proposed a consolidation package that impacts consumption, government
spending through corporate subsidies, taxes, and transfers. Public consumption will be
impacted primarily through defense budget cuts and administrative spending. In other
words consumption will be impacted through an increase in wage and job loss. Tax
revenues will be increased as tax credits are allowed to expire and additional levies are
placed on energy industry, specifically those associated with nuclear power. Also, small
increases are expected through changes in railway companies and changing the status of
fiscal authorities to “preferred” in insolvency cases.
United States: Current Account. http://www.economy.com/dismal/pro/release.asp?edition=1&r=usa_bop.
Treasury Budget, bil $
Nov 09
Oct 09
Sep 09
Aug 09
Jul 09
Jun 09
May 09
Apr 09
Total Receipts
133.6
135.3
218.9
145.5
151.5
215.4
117.2
266.2
Total Outlays
253.9
311.7
265.5
249.1
332.2
309.7
306.9
287.1
Total Surplus/Deficit
-120.3
-176.4
-46.6
-103.6
-180.7
-94.3
-189.7
-20.9
Purchase: Purchase the complete data from Moody's Analytics Research Store
Source: U.S. Department of Treasury
United States: Treasury Budget. http://www.economy.com/dismal/pro/release.asp?rk=1523D00B-D0D0-4D9F-BB35-A989424B6295.
When you consider the dollar figures of the current budget deficit it seems reasonable
that the U.S. should consider implementing similar strategies to get things under control.
In the short-term, however, they don’t necessarily have the same ability to do so.
Considering the size of the overall trade balance (negative) and the high unemployment
levels, the U.S. must be much more cautious in contracting government spending and
impacting the labor and wage market. Considering the medium to long term, the U.S.
must address the need to fiscally consolidate in order to maintain a sustainable level of
debt. If unaddressed the trade deficit is expected to grow to 8% of GDP in 2020 with
federal debt exceeding 100% of GDP. (Country and Regional Perspectives) Health care is
one issue that the U.S. is trying to correct that will hopefully positively contribute to the
deficit reduction.
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