Tag Archives: Germany

German University Life c. 1900

An American professor’s perspective as reported on Irwin Collier’s Economics in the Rear-View Mirror:

On an October morning, some years since, a recent Vermont graduate and I entered together the Aula of the Friedrich-Wilhelms-University at Berlin. Lectures were still two weeks away; but Germany is a country of leisurely beginnings and this was the morning of matriculation. The great hall was thronged with an interesting company. At a long table sat the Rector Magnificus, Harnack, the mighty theologian, and the professors of the various faculties. Moving about the room were students of three types: foreigners like ourselves; wanderers from other universities of the Fatherland; and boys from the “Gymnasium,” who had passed the “Abiturient” examination and become “mules” or freshmen. These last we regard with interest. They are unquestionably the best trained school boys in the world. For nine years they have been drilled by the best masters, every one a doctor, for some thirty hours a week. They have been taught not simply to remember, but to analyze, compare and classify, until, at the age of eighteen or nineteen stand often on a better footing than graduates of our colleges. But there is another side to the shield, as I learned when I grew to know them better. They have marred their sight — sixty per cent of Germans over eighteen wear glasses. They have hurt their health by long hours of work at home and by little play save perhaps skating in winter and gymnastic exercises on the “Turnboden.” With all his learning, the German Jack is often a dull boy. …

German Banks Send Mixed Signals on Digital Euro

In the FAZ, Christian Siedenbiedel reports that Deutsche Bank questions whether a digital Euro as envisioned by the ECB (i.e., with tight quantity restrictions) would be successful:

Die Argumentation geht so: Die EZB will den digitalen Euro einführen, um auf den verstärkten Währungswettbewerb zu antworten. … Um sich vor solchem Machtverlust sowohl durch Digitalgeld von anderen Notenbanken („Krypto-Dollars“) als auch durch privates Digitalgeld („Global Stable Coins“) zu schützen, treibe die EZB den Digitaleuro voran. Also aus längerfristigen politischen Motiven. Dabei sei unklar, ob der digitale Euro sich international am Markt durchsetzen könne und ob die Menschen in der Eurozone dafür überhaupt Bedarf hätten. “Das Design des digitalen Euros, soweit bisher bekannt, lässt erwarten, dass die potentiellen Nutzer kaum einen Unterschied zu bestehenden Bezahloptionen erkennen werden”.

Update: From the dbresearch document prepared by Heike Mai:

Lifting the limits on how much each user can hold would change the situation entirely, allowing a massive outflow of bank deposits into the digital euro. As a result, lending decisions and money creation would shift from the decentralised, privately owned banking sector to a central, state-run authority: the ECB. In this case, Europe would face the fundamental question of which type of monetary and financial system it wants. The answer to that would have to come from democratically elected representatives.

The German Banking Industry Committee sees a central role for the digital Euro, however, according to a new paper:

In a policy paper, the German Banking Industry Committee (GBIC) for the first time sets out detailed thoughts on the design of a “digital euro”. In this paper, experts from Germany’s five national banking associations draw up an ecosystem of innovative forms of money that extends far beyond the idea of digitalised central bank money, which is referred to as Central Bank Digital Currency (CBDC). The ECB will probably launch the project for a digital euro in mid-July 2021.

“To be successful, the digital euro must do three things: It must be as easy for consumers to handle as cash. It must be viable in the long term for business enterprises, e.g. for automated machine-to-machine payments. And the digital euro must be well embedded in our delicately balanced, carefully secured and highly regulated European financial system because this system guarantees safe and fair access to financial and banking services for everyone in Europe”, notes Dr Joachim Schmalzl, executive member of the Board of Management of the German Savings Bank Association (DSGV), which is currently the lead coordinator for the German Banking Industry Committee.

In the opinion of the experts from Germany’s five national banking associations, issuing money should remain the responsibility of credit institutions in the proven two-tier banking system [my emphasis], even if the digital euro becomes legal tender like cash. For this reason, the ecosystem of digital money which they propose is made up of three key elements:

  • retail CBDC for private use
  • wholesale CBDC for commercial and savings banks
  • tokenised commercial bank money for use in industry

Retail CBDC issued by the central bank is to be used by private individuals in the euro area in the same way as cash for everyday payments, e.g. to retailers or government agencies. It should be possible to use the digital euro like cash, anonymously and offline. For this purpose, credit institutions will provide consumers in Europe with “CBDC wallets”, i.e. electronic wallets.

Wholesale CBDC issued by the central bank is to be used for the capital markets and interbank transfers. The GBIC’s experts are calling for this special form of the digital euro partly because, by adopting this approach, the ECB would be able to include further digitalisation of central bank accounts in its project. The ultimate aim is to achieve improvements which can benefit consumers, enterprises and also the banking sector.

Tokenised commercial bank money, which will be made available by commercial and savings banks, is to complement the two forms of digital central bank money, in particular to meet corporate demand arising from Industry 4.0 and the Internet of Things. Tokenised commercial bank money could facilitate transactions based on “smart” – i.e. automated – contracts and thus increase process efficiency.

“Increasing process digitalisation and automation will provide completely new opportunities for Europe’s enterprises. The banking sector is ready to provide new solutions for its corporate customers by issuing innovative forms of money. The ECB must define the necessary framework that will enable Europe’s banking sector and real economy to make reasonable use of the new opportunities”, Joachim Schmalzl observed on behalf of the GBIC.

I share the skepticism of DB research. And I can understand that banks prefer to maintain the two-tiered system while pushing for broader and more efficient payment options for their business clients.

Green Returns

In the NBER working paper “Dissecting Green Returns,” Lubos Pastor, Robert Stambaugh, and Lucian Taylor argue that excess returns on green assets during recent years are unlikely to predict expected excess returns. At least that’s what theory suggests:

… green assets have lower expected returns than brown, due to investors’ tastes for green assets, yet green assets can have higher realized returns while agents’ tastes shift unexpectedly in the green direction. … green tastes can shift in two ways. First, investors’ preference for green assets can increase, directly driving up green asset prices. Second, consumers’ demands for green products can strengthen—for example, due to environmental regulations—driving up green firms’ profits and thus their stock prices.

In the data

… green stocks significantly outperformed brown stocks in recent years. … green stocks would not have outperformed brown without strengthened climate concerns. …

The bulk of the positive relation between green stock returns and climate-concern shocks evidently occurs with multi-week lags.

Expected returns on stocks are hard to identify, in contrast with expected bond returns. That’s why the authors analyze bond prices and yields:

The inverse relation between a bond’s realized return and the change in its yield to maturity is well understood, and the yield provides direct information about expected return, especially for buy-and-hold investors.

The case of German “twin” bonds illustrates this inverse relation in the context of climate concerns. Since 2020, the German government has issued green bonds, along with virtually identical non-green twins. The green bonds trade at lower yields, indicating lower expected returns compared to non-green bonds. The yield spread between the green and non-green twins, known as the “greenium,” reflects investors’ willingness to accept a lower return in exchange for holding assets more aligned with their environmental values. Since issuance, the 10-year greenium experienced roughly a three-fold widening, presumably due to growing climate concerns. As a result, the green bond outperformed its non-green twin by a significant margin over the same period. However, this outperformance does not imply green outperformance going forward. Rather the opposite is clearly true, given the now wider greenium.

The German Constitutional Court’s May 5, 2020 Verdict

The court’s press release: Beschlüsse der EZB zum Staatsanleihekaufprogramm kompetenzwidrig.

Critical discussion on Verfassungsblog by Alexander Thiele.

Critical Twitter thread by Jean-Pierre Landau.

Corinna Budras in the FAZ:

Viel größer sind die Bedenken über Kompetenzstreitigkeiten, die nun von Polen oder Ungarn angeführt werden könnten. Das wissen auch die Bundesverfassungsrichter, die diese Kritik in ihrem Urteil schon vorwegnehmen: Nur in absoluten, eng begrenzten Ausnahmefällen sei sie möglich, nämlich dann, wenn ein ausbrechender Rechtsakt” vorliege, der dazu führe, dass sich eine europäische Institution neue Kompetenzen schaffe, die ihr niemals übertragen worden seien und der deutsche Bürger dadurch in seinen Grundrechten verletzt werde. Konkret bedeutet das: Wenn sich Europa so ausbreitet, dass der demokratisch gewählte Bundestag nichts mehr zu sagen hat, steht das Bundesverfassungsgericht Gewehr bei Fuß.

Martin Wolf in the FT:

What can be done? … Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. … The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other.

In the SZ, Wolfgang Janisch and Stefan Kornelius summarize an interview with one of the judges, Peter Michael Huber:

“Der Satz der Kommissionspräsidentin von der Leyen, das Europarecht gelte immer und ohne jede Einschränkung, ist, so gesehen, falsch”, sagte Huber in einem Interview der Süddeutschen Zeitung. “Auch die anderen Mitgliedstaaten kennen äußerste, an ihre Verfassungsidentität anknüpfende Grenzen, wo sie den Vorrang der nationalen Verfassungen vor dem Europarecht postulieren.” Das betreffe aber nur einen winzigen Teil des EU-Rechts.

… “Von der EZB verlangen wir nur, dass sie vor den Augen der Öffentlichkeit ihre Verantwortung übernimmt und auch begründet – auch gegenüber den Leuten, die Nachteile von ihren Maßnahmen haben.” Weder verlange das Gericht, das Anleihekaufprogramm zu unterlassen, noch mache es inhaltliche Vorgaben. “Wir wollen nur einen Nachweis, dass das noch innerhalb ihres Mandats ist.”

Nach Hubers Worten könnte man etwa eine Begründungspflicht in die EZB-Satzung aufnehmen. Und das Verhältnis zum EuGH ließe sich durch einen Mechanismus zur Konfliktschlichtung entschärfen. “Das Vernünftigste wäre, den Ball flach zu halten und zu überlegen, ob unser Urteil nicht doch ein paar richtige Punkte enthält.”

Michael Rasch in the NZZ:

Die Verfassungsrichter vermissten besonders eine Prüfung der Verhältnismässigkeit durch den EuGH. Die Luxemburger Richter hatten, wie auch die deutschen Verfassungsrichter, von der EZB die Verhältnismässigkeit der Massnahmen eingefordert, diese aber eben nicht analysiert.

On German TV, Frank Bräutigam interviews Andreas Voßkuhle.

(Updated repeatedly.)

The Uerdingen Line Replaces The Wall

The Economist discusses the North-South divide in Germany which increasingly replaces the East-West division. The Southern states (Saarland, Rhineland-Palatinate, Hesse, Baden-Württemberg, Bavaria, Thuringia, Saxony) do better along many dimensions.

Germans in the southern states … go to better schools, get jobs more easily, earn more and live longer to enjoy it. Their governments have healthier finances, so they can invest more … crime rates are “strikingly” lower in the south.


German Federal Constitutional Court vs. European Central Bank

In the FT, Claire Jones reports about the German Federal Constitutional Court’s decision to refer a case against the European Central Bank’s PSPP program to the European Court of Justice.

“In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank.” …

While Germany’s constitutional court said the OMT programme was legal, it stipulated, based on an earlier ECJ judgment, that bond purchases had to meet a number of requirements. On Tuesday the Karlsruhe-based court said there were “several factors” to indicate that one of these requirements — that bonds must be purchased on secondary markets and not directly from governments — was being violated under QE.

From the court’s statement:

… any programme relating to the purchase of government bonds on the secondary market must provide sufficient guarantees to effectively ensure observance of the prohibition of monetary financing. The Senate presumes that the Court of Justice of the European Union deems the conditions which it developed, and which limit the scope of the ECB policy decision on the Outright Monetary Transactions (OMT) programme of 6 September 2012, to be legally binding criteria. Against that background, the Senate further presumes that contempt of these criteria would amount to a violation of competences also with regard to other programmes relating to the purchases of government bonds.

… several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were – without exception – held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset.

… the PSPP decision can no longer be qualified as a monetary policy measure but instead must be deemed to constitute a measure that is primarily of an economic policy nature.

… the ECB Governing Council may be able to modify the rules on risk sharing within the Eurosystem in a way that would result in risks for the profit and loss accounts of the national central banks and also threaten the overall budgetary responsibility of national parliaments. Against that background, the question arises whether an unlimited distribution of risks between the national central banks of the Eurosystem regarding bonds in default where such bonds were issued by central governments or by issuers of equivalent status would violate Art. 123 and Art. 125 TFEU as well as Art. 4(2) TEU (in conjunction with Art. 79(3) GG).

Previous, related post.

Berlin, or Berlin Tegel, or Air Berlin?

Berlin Tegel airport (TXL). Air Berlin flight to Zurich. Passengers have been waiting in the cabin for about half an hour. Apparently, some disagreement or confusion among ground staff on how to deal with delayed passengers. Enter the Maître de Cabine:

Ja, meine Damen und Herren. Sie haben es sicher schon bemerkt: Hier wieder mal völliges Chaos in Berlin Tegel … (Well, Ladies and Gentlemen: As you surely realize, we have once again complete chaos here in Berlin Tegel …)

While Berlin (and specifically BER) has recently been a recurring source of embarrassment for the “Made in Germany” label the chaos at Tegel is surprising. And while passengers are used to frustration with their carriers (on the outbound Air Berlin flight with a connection at TXL, I waited 5 days for my luggage) it is unusual to see airline staff vent their frustration in front of customers in such honesty.

What’s the source of the problem: The airport, the airline, or the city?

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).