Tag Archives: Germany

Money and Credit in Germany

In its April 2017 Quarterly Report, the Deutsche Bundesbank discusses the role of banks in the creation of money. Findings from a wavelet analysis indicate that in Germany, money and credit move in parallel in the long run.

In an appendix, the report mentions possible welfare costs of curbing maturity transformation, with reference to Diamond and Dybvig’s work. This is not convincing. Unlike in the typical (microeconomic) banking model, aggregate central bank provided money need not be scarce, so there is no a priori social need for the private sector to create money.


In the FAZ, Patrick Bernau und Manfred Schäfers report that the German Federal Ministry for Economic Affairs invited five research institutes to produce economic forecasts although the call for bids had stated that the Ministry would contract with at most four institutions. Legal experts agree that this procedure is illegal.

The report suggests that the institution that just made it (DIW) is led by Marcel Fratzscher who is politically close to the Minister.

OMT Does Not Manifestly Exceed ECB Competences

The German Federal Constitutional Court has decided that the policy decision on the OMT program does not “manifestly” exceed the competences attributed to the European Central Bank:

If the conditions formulated by the Court of Justice of the European Union in its judgment of 16 June 2015 (C-62/14) and intended to limit the scope of the OMT programme are met, the complainants’ rights under Art. 38 sec. 1 sentence 1, Art. 20 secs. 1 and 2 in conjunction with Art. 79 sec. 3 of the Basic Law (Grundgesetz – GG) are not violated by the fact that the Federal Government and the Bundestag have not taken suitable steps to revoke or limit the effect of the policy decision of the European Central Bank of 6 September 2012 concerning the OMT programme. Furthermore, if these conditions are met, the OMT programme does not currently impair the Bundestag’s overall budgetary responsibility.

Inequality and the Welfare State

A new book on inequality by Branko Milanovic adopts an international perspective. The Economist reviews the book:

Like Mr Piketty, he begins with piles of data assembled over years of research. He sets the trends of different individual countries in a global context. Over the past 30 years the incomes of workers in the middle of the global income distribution—factory workers in China, say—have soared, as has pay for the richest 1% (see chart). At the same time, incomes of the working class in advanced economies have stagnated. This dynamic helped create a global middle class. It also caused global economic inequality to plateau, and perhaps even decline, for the first time since industrialisation began. …

Mr Milanovic suggests that both [Kuznets and Piketty] are mistaken. Across history, he reckons, inequality has tended to flow in cycles: Kuznets waves.

In the FT, Martin Wolf argues that a significant part of the (British) welfare state is about insurance rather than redistribution:

Evidence for this comes from another IFS study  … This examined the effects of the tax and benefit systems on people born between 1945 and 1954 …

First, income is far less unequal over lifetimes than in any given year. This is because a big proportion of inequality is temporary … Second, largely as a result, more than half of the redistribution achieved by taxes and benefits is over lifetimes rather than among different people. Third, in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes, even though 36 per cent of people receive more in benefits than they pay in taxes in any given year. Finally, in-work benefits are just as good as out-of-work benefits at helping people who remain poor throughout their lives but they do less damage to incentives to work. Higher rates of income tax, meanwhile, target the “lifetime rich” relatively well because mobility at the top is relatively modest.

Marcel Fratzscher also wrote a book on the topic, focusing on Germany. He argues that the “Verteilungskampf” (redistributive struggle) intensifies and that equality of opportunity is being lost. In the FAZ, Jan Hauser summarizes a critique of the book by another Berlin based professor, Klaus Schroeder, who argues that the text is very short on substance.

Tax Treatment of Negative Interest Rates in Germany

The German Ministry of Finance has decided (p. 55, nr. 129a) that for tax purposes, negative interest rates are not to be treated as the opposite of positive interest rates. Instead they are considered fees. This treatment lowers taxable income to a lesser extent than would be the case under a symmetric treatment.

Microsoft Buys Credibility in Germany

In the FT, Murad Ahmed and Richard Waters report about Microsoft’s strategy to regain customer trust in cloud services in light of widespread US government surveillance. According to the report, Microsoft outsources data storage to a German company. The idea is that

T-Systems will act as a “trustee” of the facilities, with Microsoft insisting its employees will have no access to the data held at the facilities without the German company’s permission. The companies believe this arrangement means Microsoft will not have to respond to governmental demands for information held in these data centres, forcing official requests to go through German authorities instead.

Real Estate as Retirement Asset?

How many years of care in a nursing home does a typical single family house buy? In Der Spiegel, Christina Elmer, Patrick Stotz und Achim Tack have done the math for Germany. Accounting for price variation in care and real estate yields large regional differences: 3 years in poor regions in Eastern Germany versus 40 years in downtown Munich (see the map in the article).


Eurozone Finance Ministers Approve Third Greek Bailout

In the FT, Duncan Robinson and Christian Oliver report about Eurozone finance ministers’ approval of the third bailout for Greece, amounting to 86 billion Euros.

Contrary to Germany’s recent demands, the approval came in spite of the fact that the IMF has not committed to participate in the new program. In fact, the IMF has committed not to participate unless Greece’s debt burden is further reduced. Finance ministers effectively promised such further cuts in the future.

The deal falls short of what the German government had hoped to secure (see also this previous blog post).


Did Greece or “Germany” Surrender?

Social networks blame the German negotiators at the recent Euro summit for trying to humiliate Greece and dictating policy. This does not make any sense if one views the agreement as a loan contract between parties that are free to choose. But does it make any sense from a broader, political perspective?

According to Open Europe,

Italian Finance Minister Pier Carlo Padoan told Il Sole 24 Ore, “Almost all [Eurozone countries] were against a new [bailout] programme. Only the French, tiny Cyprus and we were in favour of a compromise. Maybe this isn’t well understood.”

In the FT, Gideon Rachman writes:

What nonsense. If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to.

German taxpayers seem to agree. According to Open Europe,

a snap Infratest Dimap poll for ARD found that 52% of respondents supported the agreement and 44% opposed it, while 62% said they want Greece to remain within the Eurozone compared to 32% who want it to leave. However, 78% of respondents said they did not trust the Greek government to fully implement the agreement.


The Economist’s Buttonwood column: “Even More on Debt and Democracy.”

Lars Feld’s comment in the FT.

Lee Jong-Wha’s comment on Project Syndicate.


Major IMF-Internal Disagreement Preceded the First Greek Bailout

At the 9 May 2010 meeting at which the IMF board approved the first bailout program for Greece, not all members approved. In fact, many members, including the Executive Director representing Switzerland, challenged the proposal, suggested less optimistic scenarios and asked for modifications. The Wall Street Journal published excerpts of the minutes in October 2013, see below.

Sebastian Bräuer in the NZZ am Sonntag also reports on the issue. He points out that the Swiss Executive Director asked what would happen if the Greek government were not to implement the agreed reforms; and if IMF and European commission were to disagree. Bräuer also reports that some European banks would have been prepared to bear losses resulting from their Greek exposure, see below.

The WSJ writes:

Swiss executive director Rene Weber in a prepared statement to the board for the May 9, 2010 meeting: We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?”

“The exceptionally high risks of the program were recognized by staff itself, in particular in its assessment of debt sustainability.”

“Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement (PSI) to avoid, according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ The Argentine ED was very critical at the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the Argentina’s crisis of 2001. Much to the ‘surprise’ of the other European EDs, the Swiss ED forcefully echoed the above concerns about the lack of debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.”

“The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had ‘silently’ changed in the paper (i.e., without a prior approval by the board) the criterion No.2 of the exceptional access policy, by extending it to cases where there is a ‘high risk of international systemic spillover effects.’”

The NZZ writes:

[Swiss ED Weber asked:] “Wie reagiert der Fonds, wenn die Behörden die Sparmassnahmen und Strukturreformen nicht umsetzen?”

[IMF-deputy John Lipsky said:] “Es gibt keinen Plan B. Es gibt einen Plan A und die Absicht, dass Plan A erfolgreich ist.”

“Ich kann die Direktoren informieren, dass deutsche Banken Unterstützung für Griechenland erwägen”, sagte der deutsche IMF-Direktor Klaus Stein. Sein französischer Kollege Ambroise Fayolle ergänzte, auch die Banken seines Landes würden ihren Job tun.

Pressure to Liberalize Services in Germany

Joachim Jahn and Manfred Schäfers report in the FAZ about pressure by the European Commission and the IMF to liberalize personal services in Germany. The IMF expects less regulation/protection of architects, tax advisors and the like to increase services growth. The tax advisors warn that liberalization would create conflicts of interest for the service providers.

German Reparations

Reinhard Müller discusses legal aspects of recent Greek demands for German reparations in the FAZ. In the past, both German and international courts have ruled against similar demands.

In the NZZ, Elena Panagiotidis reports about the atrocities committed by German occupying forces during World War II and reviews the history of unsuccessful Greek demands for reparation (by government) and compensation (by individuals).

Addendum (March 25):

An article in The Economist provides still another perspective.

Poverty in Germany

A new report by the Paritätische Gesamtverband argues that income inequality in Germany is on the rise. The data source is a micro census.

Roughly 16% of the population are poor—living in a household with adjusted income of less than 60% of the median household income. For a family of four, the threshold income value amounts to 1873 Euros per month. The share of poor people among the unemployed is roughly 60%, among single parents roughly 40%, and among children roughly 20%. Only 15% of retirees are poor according to the above definition, but this share is rising rapidly. Differences between poverty quotas in more and less poor areas are rising.

Another Estimate of the Haircut on Greek Debt to Come

In a Vox column, Thomas Philippon suggests a 3% rather than 4.5% primary surplus target on fairness grounds. His central points are:

Greece ran a reckless fiscal policy during the boom years, wasting much of the money that it received. There is no question that Greece needs a strong dose of fiscal consolidation. However, Greece’s debt should have been restructured much earlier. This restructuring was prevented by legitimate fears of contagion, and it is not fair to ask Greece to pay for that delay, which reflected a general lack of preparedness among Eurozone policymakers.

Philippon’s estimate is similar to another estimate by Paolo Manasse.

Germany and the Euro

In an FT oped, Thomas Mayer summarized a rather typical “German” perspective on European monetary policy. In his view, a sound euro needs either full political union or just stringent rules that are enforced. Helmut Kohl promised the former. When it didn’t happen, ECB independence and the Maastricht treaty should substitute. Ex post, Germany should have asked for more, in particular resolution and exit procedures (and, one may add, it should have played by the rules itself). The crises in the Eurozone illustrated governance problems. Merkel feared Grexit and tried to reestablish the rules. She

built a pan-European “shadow state” — a web of pacts to ensure that countries followed policies consistent with sound money.

It has not worked. From Greece to France, countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transfering economic resources between eurozone members, which politicians have refused to allow through fiscal mechanisms they control. This is Germany’s worst nightmare.

How will the situation be resolved? A century ago, Eugen Böhm-Bawerk, the Austrian economist and finance minister, proclaimed laws of economics to be a higher authority than political power. Some Germans say that a hard currency is an essential part of their economic value system. If both are right, politicians will be powerless to prevent Germany’s departure from a monetary union that is at odds with the country’s economic convictions.