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Thinking about Germany

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What is Germany’s current role within the EU and in the global economic system? Which game is it playing? These are questions which cannot be answered in an unambiguous and simplistic way, as often happens today.

First and foremost, we shall wonder whether Germany is the cause or the solution of the European political and financial crisis.

Certainly, the current negative economic situation in the EU comes at a time when global financial markets are losing confidence in Greece’s ability to repay its debts.

The contagion of mistrust forces also other peripheral nations, but certainly not Germany, to seek bailouts of their sovereign debt in the framework of the international community, namely the EU itself and the International Monetary Fund (IMF).

It is the time when – as was the case in the Toronto G20 Summit of June 2010 – the absolute priority of fiscal consolidation, and hence of the squeeze on public spending, is set.

However, if we make an in-depth analysis, we realize that financial deregulation and the lowering of interest rates have been the primary causes of the Eurozone crisis.

It was precisely the new availability of funding from banks – as also happened in the United States – to excessively stimulate consumption and generate a series of financial “bubbles”, especially real estate ones, which apparently increased tax revenues and hence public spending. Those bubbles, however, quickly deflated and burst out, thus creating a structural imbalance which today makes the difference between Germany and the EU “peripheral” countries.

It is also worth recalling that the Euro introduction made the intra-European banking exchanges increase by 40%, with a relative increase in real estate and commodity prices.

Too much credit and at low interest rates “doped” both South European consumers and their governments.

Nevertheless, in the current crisis situation, the EU central countries and Germany, in particular, have maintained a greater competitive margin, mainly resulting from the relatively low wage growth.

Hence, also in the recent crisis, Germany could increase its exports to the EU peripheral countries, while its banks lent money to the EU marginal countries for them to buy German goods and services.

Therefore Germany must be seen both as the cause and the solution of the economic depression of the Euro zone peripheral countries.

However is Germany currently suffering from an invisible crisis, as some analysts note?

Even in this case, the issue is more complex than it may seem.

It is worth noting that Germany is the fourth world economy and the G20 third largest exporter. It depends on its export economy as Saudi Arabia depends on oil sales.

Currently German exports account for 45.7% of the country’s GDP. Therefore Germany is forced to face the imbalances and liquidity crisis of the countries buying German goods and services.

However, are the strategies adopted so far by Germany to support and stabilize its growth through exports still sustainable?

This raises some doubts in my mind.

Furthermore, all the traditional exporting countries, such as China, Russia, Saudi Arabia and South Korea, are in crisis.

Hence Germany could press ever more with its exporting model, thus preserving the EU as a free trade area, but fiercely competing with the European peripheral countries, which also live on exports and would see the German economy burn up the land under their feet, as currently already happens in many sectors.

We experienced so also with the 2008 crisis: the recession made the sovereign debt of many EU peripheral countries unmanageable and Germany, as net creditor, has always required public spending cuts and a quick repayment of the loans granted.

However, while Germany holds most of European debt securities, and particularly of the countries under crisis, if the South European economies collapse (and this possibility cannot be still ruled out) Germany will no longer have a sufficiently large market for its exports, because it cannot offset the losses in Europe with the corresponding increase in exports to China, the rest of Asia or the Arab countries – all nations which, at different levels, are recording an economic downturn.

Hence if Germany stimulates the growth of the Euro zone which owes money to it, the debt of the EU peripheral countries will increase. However, if the debt owed to Germany by the countries already in crisis rises, the latter will experience a very severe banking crisis and a possible default on their sovereign debt.

This adds to an unemployment rate which, in various ways, amounts to 20% in Southern Europe – a rate similar to the one recorded during the Great Depression in the United States.

Hence, against this background, the German economy cannot shrink up to making impossible to preserve the German export economy model also in the EU “economic locomotive”.

Furthermore, in this situation, the South European countries in financial crisis could not even replace Germany as to exports.

A productive and financial trap of which it is extremely hard to get out.

Moreover Germany has no interest in changing its development model.

It is the model which has produced all German comparative advantages since the introduction of the single currency.

Today the signs of the German crisis, which Germany will project onto the whole EU, are already evident.

The foreign market share for the “made in Germany” products is falling and the return on investment has declined. Many German companies are lowering prices to preserve their traditional market share.

If Germany shifts from an export economy to a productive system linked to the internal market growth, the German high savings rate, which allowed the companies’ technological upgrading, will no longer be possible.

France, for example, is no longer the first EU market for the goods produced in Germany.

In 2015 German exports to China fell by 4%.

Some German exports to the United States are increasing (19%), but the US market share cannot be a substitute for a long period of time.

Currently also the United States are a low-growth country and the US savings are increasing.

On average, the US economic crisis cycle is approximately seven years – hence we shall expect that, in a year or two, the North American market will tend to shrink again.

Therefore the bubble-boost cycle is now embedded in the US economy.

Incidentally, this should make us rethink – in a new way – about Marx’s theory of the inevitability of capitalist crises.

Furthermore, as already mentioned, the return of capital on investment in Germany is ever lower.

Over the last two years, the large German groups have seen a drop in the profitability of the capital employed from 13% to 3%.

Moreover the prices throughout the Euro zone are declining.

Last January prices decreased by an average 3% and the downward trend of average prices is increasingly evident and stable.

Hence, if Germany were to fall into recession, the German solution will likely be to quickly recover the Southern Euro zone’s debt, even with some discounts, and then fiercely eradicate competition from other EU exporting countries, also with unfair or dangerous business practices.

It is worth recalling that the German exposure to Italian banks amounts to 120 billion euro and our credit institutions have a share of non-performing loans (NPL) exceeding 17%.

In absolute terms, the German exposure to Italian banks alone is worth 3% of its GDP.

Hence how long will the German patience last in a phase of economic crisis?

It is also worth considering that this year the Commerzbank profit has fallen by 52%, while Deutsche Bank has recorded a fall in profit by 58%, with a German banking system which has as many as 41.9 trillion derivatives entered in the budget.

It is worth recalling that if Deutsche Bank collapses, the Euro will follow suit.

Moreover, if Germany “bails out” Deutsche Bank, everybody will note the different treatment reserved for the German credit institutions compared to the Greek banks.

It would be a sort of “anything-goes attitude” inside the Euro and the EU proclamations would turn into all talk and no action, as well as window dressing which serves no purpose.

If the German banks (and not just Deutsche Bank) are bailed out by the government, the German debt/GDP ratio will rise from 71% to 110%.

There would be no more room for preaching on austerity by Germany, which could not but accept the Italian, Spanish, Greek and Portuguese debt “overshooting”.

It is worth noting that Deutsche Bank funds most of German exports – hence, if it collapses, the German economy will soon fall into a severe crisis.

Therefore, the following can be predicted: if Germany falls into recession, the first reaction will probably be to quickly recover credits from the Euro zone and then follow a scorched-earth approach as to exports in the rest of Europe.

On the contrary, if Germany succeeds in “standing fast”, it will have every interest in refinancing the Southern Euro zone for it to buy its goods.

In any case, however, the EU situation is neither good nor stable and, in the future, we shall see to what extent the single currency will hold firm or whether Germany, or even Italy, will try to exit from the Euro in one way or the other.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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The Covid After-Effects and the Looming Skills Shortage

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coronavirus people

The shock of the pandemic is changing the ways in which we think about the world and in which we analyze the future trajectories of development. The persistence of the Covid pandemic will likely accentuate this transformation and the prominence of the “green agenda” this year is just one of the facets of these changes. Market research as well as the numerous think-tanks will be accordingly re-calibrating the time horizons and the main themes of analysis. Greater attention to longer risks and fragilities is likely to take on greater prominence, with particular scrutiny being accorded to high-impact risk factors that have a non-negligible probability of materializing in the medium- to long-term. Apart from the risks of global warming other key risk factors involve the rising labour shortages, most notably in areas pertaining to human capital development.

The impact of the Covid pandemic on the labour market will have long-term implications, with “hysteresis effects” observed in both highly skilled and low-income tiers of the labour market. One of the most significant factors affecting the global labour market was the reduction in migration flows, which resulted in the exacerbation of labour shortages across the major migrant recipient countries, such as Russia. There was also a notable blow delivered by the pandemic to the spheres of human capital development such as education and healthcare, which in turn exacerbated the imbalances and shortages in these areas. In particular, according to the estimates of the World Health Organization (WHO) shortages can mount up to 9.9 million physicians, nurses and midwives globally by 2030.

In Europe, although the number of physicians and nurses has increased in general in the region by approximately 10% over the past 10 years, this increase appears to be insufficient to cover the needs of ageing populations. At the same time the WHO points to sizeable inequalities in the availability of physicians and nurses between countries, whereby there are 5 times more doctors in some countries than in others. The situation with regard to nurses is even more acute, as data show that some countries have 9 times fewer nurses than others.

In the US substantial labour shortages in the healthcare sector are also expected, with anti-crisis measures falling short of substantially reversing the ailments in the national healthcare system. In particular, data published by the AAMC (Association of American Medical Colleges), suggests that the United States could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, including shortfalls in both primary and specialty care.

The blows sustained by global education from the pandemic were no less formidable. These affected first and foremost the youngest generation of the globe – according to UNESCO, “more than 1.5 billion students and youth across the planet are or have been affected by school and university closures due to the COVID-19 pandemic”. On top of the adverse effects on the younger generation (see Box 1), there is also the widening “teachers gap”, namely a worldwide shortage of well-trained teachers. According to the UNESCO Institute for Statistics (UIS), “69 million teachers must be recruited to achieve universal primary and secondary education by 2030”.

From our partner RIAC

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Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery

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Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

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An Airplane Dilemma: Convenience Versus Environment

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Mr. President:  There are many consequences of COVID-19 that have changed the existing landscape due to the cumulative effects of personal behavior.  For example, the decline in the use of automobiles has been to the benefit of the environment.  A landmark study published by Nature in May 2020 confirmed a 17 percent drop in daily CO2 emissions but with the expectation that the number will bounce back as human activity returns to normal.

Yet there is hope.  We are all creatures of habit and having tried teleconferences, we are less likely to take the trouble to hop on a plane for a personal meeting, wasting time and effort.  Such is also the belief of aircraft operators.  Add to this the convenience of shopping from home and having the stuff delivered to your door and one can guess what is happening.

In short, the need for passenger planes has diminished while cargo operators face increased demand.  Fewer passenger planes also means a reduction in belly cargo capacity worsening the situation.  All of which has led to a new business with new jobs — converting passenger aircraft for cargo use.  It is not as simple as it might seem, and not just a matter of removing seats, for all unnecessary items must be removed for cargo use. They take up cargo weight and if not removed waste fuel.

After the seats and interior fittings have been removed, the cabin floor has to be strengthened.  The side windows are plugged and smoothed out.  A cargo door is cut out and the existing emergency doors are deactivated and sealed.  Also a new crew entry door has to be cut-out and installed. 

A new in-cabin cargo barrier with a sliding access door is put in, allowing best use of cargo and cockpit space and a merged carrier and crew space.  A new crew lavatory together with replacement water and waste systems replace the old, which supplied the original passenger area and are no longer needed.

The cockpit gets upgrades which include a simplified air distribution system and revised hydraulics.  At the end of it all, we have a cargo jet.  If the airlines are converting their planes, then they must believe not all the travelers will be returning after the covid crisis recedes.

Airline losses have been extraordinary.  Figures sourced from the World Bank and the International Civil Aviation Organization reveal air carriers lost $370 billion in revenues.  This includes $120 billion in the Asia-Pacific region, $100 billion in Europe and $88 billion in North America.

For many of the airlines, it is now a new business model transforming its fleet for cargo demand and launching new cargo routes.  The latter also requires obtaining regulatory approvals.

A promising development for the future is sustainable aviation fuel (SAP).  Developed by the Air France KLM Martinair consortium it reduces CO2 emissions, and cleaner air transport contributes to lessening global warming.

It is a good start since airplanes are major transportation culprits increasing air pollution and radiative forcing.  The latter being the heat reflected back to earth when it is greater than the heat radiated from the earth.  All of which should incline the environmentally conscious to avoid airplane travel — buses and trains pollute less and might be a preferred alternative for domestic travel.

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