Investor confidence in Germany, Europe's largest economy, rose the most in two years in July as the euro's decline helped exporters.
A measure of institutional and analyst sentiment rose to a 10- month high of 37 from 19.5 in June, the ZEW Center for European Economic Research in Mannheim, Germany, said today.
The euro's 11 percent depreciation against the dollar this year is supporting exports, cushioning the effect of record energy prices and near-record unemployment. Sales abroad powered German growth in the first quarter, surging 2.9 percent as the economy expanded at the fastest quarterly pace in four years.
The lower exchange rate "is surely helpful'' and "could be positive for business confidence in the months ahead,'' said Elwin de Groot, an economist at Fortis Bank Nederland NV in Amsterdam. "Despite the rise in oil prices, we have some signs that the industrial sector is Europe is gaining some momentum.''
Good thing, perhaps, because ECB policy looks to be relatively constrained at the moment:
While the euro's depreciation makes German products more attractive to overseas buyers, it magnifies the impact of higher dollar-denominated oil prices at home...
German producer prices jumped 4.6 percent in June from a year earlier, driven by oil-based products, the Federal Statistics Office in Wiesbaden said today...
The euro zone's been hit by a "double-whammy,'' said James Nixon, an economist at Barclays Capital in London. "The lower euro is exacerbating the oil price effect. That's why were seeing a noticeably less dovish tone from the ECB."
European Central Bank Chief Economist Otmar Issing said July 14 the price outlook has "clearly worsened'' in the past month, indicating the bank is not inclined to cut interest rates to boost economic growth in the 12 nations sharing the euro.
OK, now I'm a bit puzzled. One of the presumed benefits of setting an explicit "medium-term" inflation target -- at least one of the benefits I have often repeated -- is that it will induce more flexibility in the sense of not having to react to price pressures that clearly ought to be temporary (because inflation expectations are anchored on the target), and allowing the central bank to error on the side of not-too-tight caution in the face of weakness in the real economy. Is it possible that we are seeing that this argument in favor of inflation targeting has been oversold?
Meanwhile, there are significant changes afoot in the German banking sector. From Deutsche Welle:
The world is now a much tougher place for Germany's regional state banks or "Landesbanken" as their state guarantees expired at midnight on Monday.
Following long battles with the European Commission, Germany's 11 public-sector regional state banks lost their state guarantees at midnight on Monday, a privilege that enabled them to refinance themselves via the capital markets at very favorable conditions and pass on the cheaper borrowing costs to their customers.
In general, I'm inclined to think this could be a pretty big deal. Because most of our macro models are not particularly sophisticated when it comes to the role of financial intermediation, it is easy for us to underestimate the impact of distress in the banking sector . But you don't have to go back to the banking crises of the pre-Fed years or the Great Depression to convince yourself that we do so at our own risk: Think Japan in the 1990s or the U.S. in the late 80s, early 90s.
Nonetheless, the particulars of this change in Germany may mitigate any broader impact:
In 2001, the EU Commission ruled that the practice should be abolished. But in order to give the Landesbanken time to adapt, it was agreed that the state guarantees would only cease at midnight on July 18, 2005.
Furthermore, any debt issued prior to that date would continue to be backed by the state until 2015. So, while the playing field is indeed being levelled, the process is still happening only very slowly...
... some of the banks are already joining forces. The Landesbanken of Baden-Württemberg and of the Rhineland-Palatinate merged recently, as did the banks of Kiel and Hamburg. Frankfurt's Sparkasse is being taken over by the Hessische Landesbank and WestLB and NordLB are also collaborating closely.
I'd be interested in hearing from anyone who has a better feel for the details of this story.