Summarizing the #DraghiReport as “Germany should pay for others” is absurd and ignores basic data.
Germany would be a top beneficiary of the plan.
Charts from my note earlier this week👇1/n
Unlike in the past, structural headwinds now affect Germany more than the EA 'periphery' because of Germany’s overexposure to manufacturing and exports.
First, China turned from key export market into fierce industrial rival in the auto sector and across advanced industries. 2/n
Second, energy cost-competitiveness is now a major factor threatening the existence of a large share of the German manufacturing base – ~10% of Value Add and 8% of total employment, roughly equivalent to the car manufacturing sector. 3/n
Third, Germany needs strong EU demand more than ever, as US protectionism rises. Strong US demand after Covid has helped German exporters to partly pivot away from China. But US tariffs risk crushing German manufacturers in a deadly pincer movement. 4/n
Meanwhile, also to compensate for lost UK demand after Brexit, Germany has been fighting with CEE countries for market share in the EU, which remains its top export destination. Helping sustain investment and demand in the EU is in the interest of Germany itself. 5/n
Fourth, German demographic trends point to a faster decline in population by 2050 than for the EA average. Rapid demographic decline will compound the already big labour (largely skill) shortages. Investing to boost skill upgrades and revive productivity is key. 6/n
But financial benefits for Germany would also be TANGIBLE:
The EU defence industry is largely Franco-German: new military procurement rules that favor EU suppliers and any new joint effort to coordinate and scale up investment would make money flow to German firms. 7/n
There is more: Germany is consistently the largest recipient of EU funds to research (Horizon Europe) and it’s the place where innovative research is most concentrated (e.g. AI patents). Scaling up investment in innovation would naturally benefit Germany and the EA 'core'. 8/n
Germany scores terribly on public investment. On average in 25 yrs public capex growth has been virtually ZERO, net of depreciation! Depleted transport infrastructure is a top reason for firms to hold back capex. Germany looks like should be a net RECIPIENT of EU transfers😉9/n
But Germany will never be able to overcome its huge challenges on its own if the “debt brake” remains in place. The Federation of German Industries (BDI) puts the investment need to restore German competitiveness at 1.6% of GDP per annum until 2030… 10/n english.bdi.eu/#/article/news…
Finally, underinvestment in social and physical infrastructure exacerbating the retreat of private capital from peripheral regions (Eastern Germany) is what drives political polarization – immigration is just the trigger. Will Berlin listen? 11/n
Many have pointed a lot of this out at the same time, but especially @SanderTordoir , @BergAslak et al @CER_EU , who made a thorough and well-balanced summary of the original report. END
cc: @TS_Lombard
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Quite big: 1.0 for infra/defence and 0.2 for EZ spillovers, *at least*
For starters, the proposed package is very large in historical context. 1/
Prior to 2008-09 crisis, consensus had German fiscal multipliers around 0.6-0.7. But studies glossed over the state-dependent nature of multipliers and differences in fiscal tools. Since then, literature has shown that output multipliers are larger in certain conditions: 2/
Since the GFC, austerity further emphasised public investment as an effective fiscal tool, esp. in Germany. Studies pointed to a German fiscal output multiplier for infrastructure at least as big as 1.0 and to the enhancing effect of monetary tolerance for fiscal expansion 3/
High energy costs, China’s rivalry and rising protectionism are strong headwinds.
But structural factors cannot fully explain the ongoing industrial recession.
What about ECB-induced domestic demand suppression and housing collapse? 1/
First, the fall in German and EA intermediate goods orders (most relevant for energy-intensive output), has been steeper than for other foreign orders. And it has continued despite the drop in energy/input costs, and easing supply bottlenecks.
Second, EA housing collapsed. 2/
What about the adage “housing is the business cycle”? Unlike for manufacturing, there's no doubt that surging interest rates are the main driver of EU's housing crisis.
And energy-intensive products (ceramics, glassware, metals, rubber, plastics...) are key building materials 3/
The EA heads for cyclical stagnation: fade ultra-bears talking about rising risks of “deep recession”, but dropping industrial orders and retail sales since March simply confirm EA underlying growth weaknesses 2/
German industrial production also shows that all the chatter about EA’s rebound in Q1 was just overexcitement about China’s reopening, cheaper energy and easier supply chain bottlenecks against the backdrop of resilient US growth 3/
Confused about Euro Area's long-term macro? Overwhelmed by negative consensus and headlines? Well, it's time to consider the long-term bull case for Europe. Chart-heavy 🧵 1/
No doubt, the old export-led EA growth model is dead. The EA is losing competitiveness. First, China is turning from key export market into industrial rival. A big problem for overexposed EA economies and firms 2/
China’s competitiveness gains in those very markets so far dominated by the EA have become a top policy objective (see “dual circulation” and “Made in China 2025”). The Green Transition has accelerated these developments 3/
With the bank turmoil of the past weeks investors have reawakened to credit risk. So far, banks’ exposure to Commercial Real Estate (CRE) has attracted most of the attention. But CRE is just one example of rate-sensitive, illiquid, opaque asset class. Little thread 1/
In EU, banks’ credit risk via CRE concentrates in the Nordics and Central Europe. Sweden tops the table, but, in the EZ, fixed-rate mortgages make Germany, the Netherlands and France less exposed (although more exposed in terms of loan profitability!) than Austria and Finland 2/
But it’s not only banks: a downturn in CRE can spark feedback-loops with nonbanks (investment funds, insurers etc). True, CRE exposure in EZ is largely borne by banks, but nonbanks account for 60% of all CRE transaction value and funds’ leverage can amplify banks’ credit risk 3/
This (quite long) thread is #my2cents on the output gap campaign #CANOO started by @RobinBrooksIIF and supported, among many others, by @alan_tooze and @MESandbu . Pls read it till the end. I don't want to be polemic. I'm just looking for answers (1/x)
In EU this is a vital *political* debate. Given the well-known output gap measurement issues especially in real-time, references to 'cyclically-adjusted' fiscal balances in budgetary rules at EU level and in member states are a serious problem (2/x)
I sympathise with the claim that the Eurozone would benefit greatly from fiscal expansion both in aggregate and in specific countries, primarily Germany. Anaemic domestic demand and limited ECB policy ammunitions call for a fiscal response (3/x)