Germany Monitor

National elections will be held in Germany in the autumn of 2013. The election campaign will be shaped, above all, by personality issues, second by the stance towards the euro crisis, and third by some modest domestic social policy issues. Steinbrück receives good ratings for tax issues and leads over Merkel on social issues but Chancellor Merkel benefits from a solid economy and her stance on euro politics, reflected in her high popularity. Steinbrück and the Greens are outspoken on stricter banking regulation and a separation of investment banking from commercial banking. Merkel and her coalition have kept a low profile on this issue so far but the banks will remain under scrutiny. [more]

The rise of mobile and online payments opens up new opportunities, but of course also presents new risks for financial services providers. A lot of attention is currently paid to the (walled garden) strategies of new competitors such as Google, Apple or PayPal. They are increasingly putting out their feelers in segments outside of their own territory, e.g. the market for (mobile) payments. Those financial services providers who do not modernise their upstream and downstream value chains or subject them to the transformation process required for the digital network architecture could suffer painful losses over the medium term. Our paper draws four scenarios on how the market share of banks might develop in about three to five years’ time, with a particular focus on the European market. [more]

The political dynamics in Europe have shifted against universal banks in recent months. This is a dangerous development that threatens the key role such banks play in modern economies and risks putting European banks at a competitive disadvantage to their peers in the US and Asia. [more]

We assess the economic outlook for the Western Balkan region, including Croatia, Serbia, Albania, Bosnia-Herzegovina, Macedonia, and Montenegro. Each country in the region is on the road to EU accession, though they are at very different stages of the process. The most advanced, Croatia, is set to become the EU’s 28th member towards the middle of next year. For the rest, it could be a long road given the economic and political challenges that they face, and also a sense of enlargement fatigue among some existing member states. [more]

“Unity in diversity” – is how the debt and financing structure of Germany’s Länder could be neatly summed up, since there are very significant differences between the regions with regard to both the volume and the type and maturity of the debt. Whereas in the past the Länder mainly financed themselves by borrowing from credit institutions, the importance of capital market paper has grown sharply in the meantime. For example, the volume of Länder bonds has risen to more than EUR 300 bn of late. A highly important factor in this connection is the solidarity within the federal state, as the Länder benefit from the good credit rating of the Federation when they procure capital market funding. [more]

2010 saw the establishment of Germany's Stability Council, a joint body representing the Federation and the Länder with a mandate to avert serious budget problems. At the third meeting of the Council in late May 2011 it wasted no time in formally determining the existence of a looming budgetary emergency in the four Länder of Berlin, Bremen, Saarland und Schleswig-Holstein. These four states have until mid-October to devise five-year restructuring programmes mapping out how they intend to eliminate their budget imbalances. What does this mean for federal and Länder fiscal policy in practice? And how is this to be viewed against the backdrop of the new debt brakes to be installed as of 2016 and 2020, respectively? How does this approach to more sustainable financial planning and greater coordination compare with efforts at the EU level? [more]

The German textile and clothing industry has experienced a dramatic structural change in the last few decades. Competitive pressure has led, on the one hand, to declining domestic production and, particularly in the case of labour-intensive products, to the transfer of production abroad. On the other hand, firms are concurrently concentrating more on technically demanding textiles, innovative products and strong brands, and are orienting themselves more internationally. [more]

The financial situation of Germany’s Länder, or constituent federal states, is often overshadowed by the situation of the Federation and the municipalities. In the course of this year DB Research plans to publish a series of articles on various topics pertaining to the Länder and their finances. This launch study aims to highlight the complex financial relations between the Federation and the Länder as well as the latter’s limited autonomy. The Länder are allowed to make largely autonomous decisions solely in respect of borrowing; capital market financing has gained considerable significance for a number of them. The scope of the financial equalisation system and the judgements handed down by the Federal Constitutional Court ensure the practical anchoring of the solidarity principle, which is tantamount to a joint liability system with a bail-out guarantee. More Länder autonomy – partly by means of a surcharge on income tax – would make sense. The creation of the Stability Council and a debt brake at Länder level has for the first time produced a preventive instrument for timely corrective action in the event of budget imbalances. [more]

Of course it is important to keep close tabs on the path of inflation going forward – especially in view of a volatile oil price – and the ECB has spoken also in this context of its “strong vigilance”. Yet an inflation rate of 2% or perhaps 2 ½% in the coming months largely represents a reversion to the normal pattern following the recession-induced lows of the past two years, driven mainly by oil and food prices. In any event, on the assumption that food and oil prices return to normal our DB Research inflation model forecasts no dramatic surge in inflation. We are aware, though, that some of the structural changes of the past decades may have reduced the meaningfulness of the forecasts produced by such a model. [more]

Our forecast of 2% GDP growth in Germany in 2011 is indeed quite optimistic. Moreover, there are two articles in this issue of Current Issues which demonstrate that the financial and economic crisis has not dampened growth potential in Germany. On the one hand, no structural imbalances developed prior to the crisis. On the other hand, in particular the labour market reforms and successful company restructuring over the last decade have ensured that the German economy is in excellent shape on an international comparison. The adjustment processes had, however, resulted in weak growth in household income. This could now improve. Private consumption is expected to grow by almost 1 ½% p.a. on a medium-term horizon. This would, however, be a sustainable performance that is not based on debt and real estate bubbles – in sharp contrast with the considerably higher consumption growth in several countries before the crisis. [more]