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Stagnation or recession: What threatens the banking system of Germany and the eurozone in 2020

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“One of Germany’s most acclaimed experts” in economic risk analysis, Marcus Krall, “predicts the collapse of the German banking system and the eurozone by the end of 2020.” Krall describes the euro as an “erroneous structure,” whose existence is maintained for political reasons. According to Krall, the euro has a negative impact on Germany’s competitiveness and “weakens the country’s banking system”. Most eurozone countries would “have gone bankrupt” long ago if the European Central Bank did not support them by lowering interest rates. “At the end of next year, Europe may face a dramatic decline in the availability of loans.” There will be massive bankruptcies of businesses, and the unemployment rate will soar. In an attempt to save the situation, the ECB will resort to emissions, which, in turn, will provoke a leap in inflation and “loss of savings not only of the Germans, but also of everyone who invested in euros.” The crisis in the European economy will undermine political support for the euro, “and countries will return to their national currencies.”  It sounds threatening, but let’s try to look at the details.

The slowdown of the German economy has been in place for several years. According to the returns of the year 2018, the GDP growth dropped to its lowest in the past 5 years and amounted to 1.5%, which is a decline of 0.7 compared to 2017. The largest EU economy “narrowly escaped a recession”. In the second quarter of this year, German GDP decreased by 0.1% against the same period the previous year; which, in annual terms, reduced the growth rate to 0.4%. Official forecasts for the results of the current year have been reduced to 0.5% – more than three times, compared with last year’s expectations. By early autumn, forecasts for a further decline in exports amid fears of a general slowdown in the global economy led to more expectations of a further slowdown of the economy.  The government of Angela Merkel, after expressing optimism about growth prospects for the current year, began to acknowledge the problem.

The economy of Germany is to a large extent dependent on exports, and any serious turmoil in international trade will cause Germany more damage than any other EU country. An important factor is the ongoing trade war between the United States and China, which is on the verge of a new escalation. What also creates a negative outlook for the entire European economy is the prospect of Brexit without an agreement between London and Brussels. Finally, the Chinese economy is slowing down, which has caused a decrease in demand for German export products, primarily cars. According to The Financial Times, in the first half of this year, the output in the car-manufacturing industry dropped by 12 percent. Also, the anti-Russian sanctions are hitting “the German farming sector and processing industries; German companies are losing jobs and profit,” – reports Gazeta.ru. Meanwhile, consumer spending and domestic investment continue to grow. Unemployment is at its lowest since the reunification of Germany. Reports of September 9 say that in July German exports rose again by 0.7%, rather than fall, as most observers had expected. Nevertheless, entrepreneurial confidence continues to decline in almost all sectors of the economy. Thus, the GDP growth rate in the 3rd quarter will make the key factor: in case of a decrease, we will be able to talk about a recession in Germany in the formal sense of the word.

Like most European banks, German comapnies have long been fighting a fierce battle to maintain the profitability of business amid the long-running period of ultra-low interest rates. Meanwhile, bond yields, especially long-term ones, continue to decline throughout Europe. The yield on German government bonds is negative for all securities with a validity term of up to 10 years inclusive. For 30-year bonds, the yield fluctuates around zero. The rate difference between short-and long-term borrowings – the main source of income for banks under normal conditions – is close to zero. As investors rush in search for safer assets, the forecasts are disappointing: negative rates will persist “for several more years.” Another negative prospect for the German banking system is the de facto negative rates on ECB deposits. In fact, banks have to pay the Central Bank for keeping their capital in its accounts. The prospect of a new drop in the ECB interest rate in the near future is causing more anxiety among investors.

The ECB is signaling its willingness to lower interest rates in order to neutralize the slowdown in the entire eurozone.  Experts predict that the ECB will either keep rates at the current low level or lower them even more, at least until mid-2020. In these conditions, the German government is likely to resort to tough measures to secure a deficit-free budget, at least in 2019. However, the policy of cutting the state debt could be revised. At the end of this summer, German Finance Ministry officials publicly spoke about a “package of economic incentives” that could be put into effect in the event of a recession in Germany. Depending on the extent of such stimuli, the balanced annual budget policy may be put at risk.

In 20 years, the euro has turned Germany into a key EU economy, critical for the economic stability of the entire union. At the same time, it has become a major factor that cemented the isolation of Germany in Europe. As skeptics had predicted, the admission to the eurozone, despite tough selection criteria, of countries very different from the economic point of view, led to the fact that a deterioration in the global economic situation hits the weakest member countries the hardest. According to critics, “the euro exchange rate is clearly too high for France and Italy (this becomes a blow to their competitiveness), and too low for Germany.” During the Eurozone crisis of 2009, there appeared a vicious circle: the dominance of the Federal Republic of Germany’s economy in the EU allowed Berlin to dictate its conditions for strict budgetary savings to most of Europe. This, in turn, gave rise to an outbreak of anti-German sentiment in a number of countries on the continent, including Greece and Italy.

By now, Central Europe has turned into a supplier of semi-finished products and spare parts for German enterprises. The rest of the EU countries are a market for German goods. Simultaneously, Germany is forced to pay for the economic failure of an increasing number of its partners in the eurozone. Thus, the economic power of Germany, while being the backbone of the entire economic system of the EU, has become almost the main threat to the European integration project. Even though the German economy boasts a significant amount of strength, “weak domestic credit performance, the risk of a global trade recession and the slowdown in China” will continue to “push” Germany to recession, – SaxoBank analysts quoted by Gazeta.ru said in the middle of the year. According to the June results, industrial production went down by 5% year-on-year. The ZEW economic sentiment index has reached its lowest level since December 2011. According to Eurostat, published in early September, the total GDP of the euro area countries grew by only 0.2 percent in the second quarter, which is two times lower against the first three months of this year.

In late August, The Economist made a prediciton that Germany would follow the path of Japan, which has been waging an incessant struggle against the threat of stagnation for decades. Like Japan, present-day Germany is rich, burdened with a large state debt, as well as an aging population. Trends in the German bond market also signal “endless stagnation.” Concerns are growing that politicians have “forever” lost their ability to improve the state of the economy. Moreover, the decline in consumer prices “pushes” discount rates yet lower. As a result, many experts believe that Berlin may be faced with the need for a more “self-oriented” policy, at least in the economic sphere.

Meanwhile, considering EU membership criteria, the majority of the eurozone member countries are in no position to take  any significant steps  in the event of a genuinely unfavorable turn in the global economic situation. The presence of the euro and the “unprecedentedly” high degree of independence of the ECB with its extensive powers put severe restrictions on the possibility of influencing the economy of individual states. In accordance with the current requirements of the eurozone, governments have to either increase taxes or reduce government spending – even if it harms the national economy. Formally, there is a monetary mechanism to counter economic upheavals in a particular eurozone country to minimize their consequences for other participants. From the point of view of abstract macroeconomic indicators, this mechanism has been functioning well up to now. But, judging by what we witnessed in Spain, and then in Greece and Italy, its socio-economic and political costs are extremely high.

Also, the ECB itself is pretty hard-up at the moment. In the spring, it extended the program of preferential lending to the banking sector. However, inflation is steadily below the 2 percent target, and interest rates, as mentioned above, are fluctuating around zero. The government bond retirement program, especially in the case of Germany, is already approaching the limit established by the current legislation. Given the situation, economists fear that in the event of a new economic shock, there may simply be “no room left” for monetary policy measures. According to pessimists, “Europe has already reached this point.” Thus, for the first time in the past decade, we can talk about the need to use fiscal stimuli. And it is completely unclear whether the decisions, which are likely to be the result of numerous political and bureaucratic compromises, will prove effective. Thus, the recently announced plans in the fiscal sphere of individual countries indicate, according to economists, the high probability of an increase in the eurozone budget deficit – up to 0.8 percent of its total GDP in 2019, The Economist reports. While the budget deficit keeps growing in Italy and France, Germany does not lose hope for a small economic growth in annual terms. In the absence of a common eurozone budget, “general” fiscal measures can again turn out to be only the arithmetic average of the diverse decisions taken at the national level. Optimists expect fiscal stimuli to add 0.2-0.3 percent to eurozone GDP growth by the end of this year. Yet again, much depends on Germany with its extremely significant “space for maneuver”.

However, Berlin is still in two minds about it, probably, because in the case of fiscal stimulus measures, consensus is important, along with a good coordination of actions of the governments of different countries. Only in this case could fears of stagnation disperse. Finally, the scope of necessary incentive measures requires a high degree of political credibility. Therefore, it cannot be ruled out that an economic recession in Germany could introduce substantial changes to the plans or dates of the transit of the supreme power scheduled for 2021. For Germany it took more than for other European countries to stop resisting the idea of fiscal stimulus for the economy. Now, observers argue whether the German authorities could go too far. In any case, they have yet to agree on such key parameters of the general budget of the eurozone as its size and permissible applications. Meanwhile, as pressure on the European economy keeps growing, a collapse of the eurozone can no longer be ruled out.

At present, there are still chances for Germany to avoid a recession, if not in the technical, then in the practical sense of the word. And even if it starts, the Federal Republic of Germany will enter it with one of the lowest unemployment rates among all countries of the world. By their nature, most factors that push the German economy “down” can be considered temporary. Nevertheless, more and more experts come to the conclusion that the economy of Germany “is balancing on the brink of recession.” The banking sector of Germany is busy struggling to maintain business amid zero or negative yield on assets, just like most banks in other countries of the euro area. Every day, it becomes clear that, in order to save the eurozone, the participating countries will have to make the difficult choice between delegating some part of fiscal sovereignty in favor of the hypothetical “common” supranational “finance ministry”, on the one hand,  and on the other, going on with their attempts, which are increasingly costly, if not utterly useless in the current conditions, to withstand cyclical fluctuations in the economy with the help of the ECB monetary measures alone. 

From our partner International Affairs

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Negative effects for Russia of the US-China Phase-One-Deal

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After a 1.5-year trade dispute between the United States and China in which both have raised mutual import tariffs from 3.8 percent and 8.3 percent to 21 percent each, and as a result of which the US-Chinese merchandise trade has dropped by almost USD 90 billion, US President Donald Trump and Chinese Vice Premier Liu He on January 15, 2020 signed the first phase of a highly controversial and fiercely negotiated trade agreement. On February 14, 2020 this so called “Economic and Trade Agreement” (ETA) entered into force and marked a new phase in the protracted geopolitical rivalry between Washington and Beijing.In this highly asymmetrical contract, the Chinese commit to open their market and to buy significantly more goods from the United States than before, which is in line with Trump’s wish for a lower trade deficit. This means a doubling of merchandise imports from the United States, because within two years Beijing is expected to increase spending on selected US goods by around USD 200 billion (compared to the base year 2017).In return for the Chinese concessions, Trump has only committed to waiving new tariffs and to halving the most punitive tariffs for a subset of products from the current 15 to 7.5 percent. In the usual American manner, this has so far only been promised as an oral understanding.According to the latest calculations by the Kiel Institute for the World Economy (IfW Kiel), the purchase commitments can result in significant trade diversion effects and market share shifts for China’s trading partners. As a result, Brazil (-19 percent), the EU (-17 percent) – including above all Germany (-7 percent), and Russia (-10 percent) would have to expect the greatest export losses.Accordingly, Russian exports to China could be 10 percent lower by 2021, which is equivalent to a loss of USD 3.1 billion.

Russian energy exports hit hardest

US presidents have always tried to ensure American energy dominance. The “Nord-Stream 2” pipeline, which is to bring 55 billion cubic meters of Russian natural gas to the German and Western European markets annually, remains a thorn in Washington’s side, but the Phase-One-Deal gives the USA better access China’s energy market – the world’s most desirable.A recent study by the Institute of the German Economy (IW Köln) shows that due to the agreed energy imports, the US would move from eleventh place in 2017 (USD 6.8 billion) to first place (USD 41 billion) in 2021 in China’s supplier list of energy carriers. In absolute terms, Russian crude oil exports to China would be the most affected : by 2021 they could be 12 percent lower, corresponding to a loss of USD 2.5 billion.On a relative scale the artificial trade changes would also significantly affect other important Russian export sectors to China. Exports of soybeans could decrease by 25 percent or USD 10 million, of sunflower oil by 29 percent or USD 40 million, of coal by 10 percent or USD 180 million, of seafood by 9 percent or USD 100 million, of aircraft parts by as much as a third (USD 40 million).Furthermore, the agreement may jeopardize Moscow’s intention to become an important natural gas supplier for China. In December 2019, the “Power of Siberia” gas pipeline was put into operation, under which a supply contract of over 38 billion cubic meters per year was concluded with China for a period of 30 years. Additional quantities are expected to be sold through an LNG terminal in Vladivostok in the Asia-Pacific region. Accordingly, China is to become the second most important gas sales market to Russia after the EU. However, the trade diversions in the ETA agreement could result in China’s imports of liquefied natural gas from Russia dropping by 25 percent by 2021, representing a loss of USD 10 million.According to Dr. Sonja Beer, economist at IW Cologne, it is too early to say exactly which group of Russian energy exports to China will be affected most.“The problem is that the energy section of the agreement only says that China will buy liquefied natural gas, crude oil, coal, etc. from the United States, but does not indicate which of these product groups is to be given priority and to what extent. More precise calculations are therefore not yet possible. However, due to the high Chinese import tariffs for American LNG (25 percent), we can assume that China will concentrate more on buying crude oil in the USA. Especially since China announced earlier this month that it would halve the existing 5 percent tariff for crude oil. It is impossible to predict exactly how trade flows will change in this case, but this could adversely affect Russia and Saudi Arabia, the largest suppliers of crude oil to China”, Beer explains, adding: “If Chinese LNG tariffs are significantly reduced, Beijing could buy more gas from the United States. This, in turn, could adversely affect Australia and Qatar and the prospects of increasing the supply of Russian gas to the Chinese market”.

Phase-One-Deal violates WTO criteria

Dr. Gabriel Felbermayr, President of IfW Kiel, also criticize the new trade deal between China and the USA.“The deal leverages free market principles in favor of the USA and to the detriment of third parties. “Managed trade”, i.e. explicit agreements on trade volumes for certain product groups, also clearly violates the WTO guidelines and thus undermines the multilateral trading system”, argues Felbermayr.After the likely re-election of Donald Trump as President of the United States, protectionism and “managed trade” trends are expected to further intensify in the global economy, which is still dominated by the United States. In any case, such a “managed trade” agreement with China is not the first of its kind under Trump’s presidential administration. Already on September 25, 2019, the United States and Japan announced a trade agreement that hardly fulfills the criterion of “essentially complete trade” under Article XXIV of the GATT (WTO), since the scope of customs liberalization is very limited and asymmetrical in favor of the United States.

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Inflation and Economic Crisis in Pakistan

M.Abaid Manj

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Cooperation on International level to protect economy and financial markets is a good development, but in our country with sealed borders amid the killer virus fatalities, economy and financial market is in deep crisis. Prime Minister and his team are taking different measures ranging from domestic to international level, to win the war against the COVID-19 disease, but the fear and consternation forced investors to confine themselves to a limited investment in government and private sectors. Recently, government declared a state of emergency which again left adverse impacts on supply chain and flow of goods. Due to emergency, most companies and businesses are operating from home, but they are in deep financial crisis. All the Businesses across the country are badly affected including travel Industry. While crisis deepen, investors choose different way to save their investment.

The development of society depends on its needs. For this, there are some rules and regulations in every society that inculcate citizens to follow these rules and the way a country developed. From the borders of the country to the point of view, every person is tied to the chain of economics. The chains of this chain are so deep that every moment from the universe to the bedside they are interconnected. Every need of the world is related to money and the value of money depends on export and financial market’s fluctuation. For example, the value of dollar is converted into many rupees in Asia shows that where the currency stands against the dollar.

The source of inflation on a daily basis and the source of human identity, determines quality of life. The maturity of the foundation is seen revolving around the economic activities of individuals. There are many important points to influence individual forces and social decisions. But there are problems in the destinations when they are difficult to travel. Such destinations are always full of thorns. The jatts of the destination make the paths easy or difficult. It is possible for any community or regional head to rise only when its economic action is spoken of social values.

If the principles are made, Europe has adopted social and economic principles to further its agenda, and even we can say that they are following the streak what Islam suggested. If our state is talking about madina state, then it can be learned as a matter of fact, then the social patches can be straightforward, but the actions were considered to be very straightforward. It is known to be done. The life of the world is always a matter of humility, politicians are one of his inventions, and human being is not only a human being, but also the principle of compassion is also learned. The principle of humility is also one of those who make humans humble with humans. The principles of a human being become the destiny of an area.

The last several years of Pakistan’s economy were regarded as highly inflationary periods due to its political instability. Inflation has been the major obstacles in the way of development since years. The inflation adversely affected the country economic growth and financial sector development. Since the last six months, Pakistan received $8 billion in grants and loans from Saudi Arabia, the United Arab Emirates and China, but cannot be termed as the whole panacea for its financial and economic diseases. We need more help and more progress to stabilise our economy. International fuel prices have also cause inflation. The inflation hike is mainly due to the increasing prices of fuel and food, according to a PBS statement. The country GDP growth would remain close to 2.5% because of slowdown specifically in large scale manufacturing and agriculture sectors. According to macrotrends, the year 2018 average the inflation was 5.8%, which was quite low this year. If the average inflation of the budget 2016-17 was 4.1%, then the average inflation rate of 2017-18 was 2.9%. The rate of the year was 7.0%. According to the 2018- year of March 2019, inflation is 9.4% at the record level. According to the Pakistan bureau of statistics, the measurement of mingi is distributed to groups. In this group, cpi (consumer price index) includes nfne non-food and non-energy items. Oil, petrol, diesel, CNG, electricity and natural gas Inclusive. Their rates were recorded at 5.6% in July 2017-18 and 7.6% in 2018-19.But in the year 2017-18, the average rate was recorded 5.6% and the average rate of 2018-19 was 8.1% extra. After that, the effects of inflation were seen by dividing people into five groups in terms of income.

The first group was 8000-12000, which was 2.7% in 2017-18 and 4.9% in the year 2018-19. The second group is 8000-12000, which is 3.0% in the year 2018-19 in the year 2017-18. The third group was 12000-18000, which faced 3.1% in the year 2017-18 and 5.5% in the year 2018-19. What is the salary group? The fourth group is considered as a salary class, it has experienced an average rate of inflation in the year 2017-18 at 3.3% and 6.6% in the year 2018-19. In the end, more than 35,000 people included in the year 2017-18, who did not tolerate the rate of inflation from 4.4% in the year 2018-19 and 8.4% in the year 2018-19.

 If the annual average is taken out, 3.8% in the year 2017-18 and 7.0% in 2018-19. After that, if the wpi (wholesale price index) wholesale goods are spoken, the agricultural forestry and fish industry 7.4% in ores and minerals 14.31%, the clothing industry 13.79%, leather 33.07%, metal machinery 6.70%, and 21.15% in the transport goods were increased. The record was behind the inflation, the imf went to the previous government or the current government’s wrong policies. In the past sixty years, 6000 billion Pakistani rupees were one million twenty thousand, but in these two bells, one million sixty Thousands will be born. The current government has raised 11 thousand billion loans in different deal forms.

Every day in 2013, the PPP has taken 5 billion rupees every day, 2018 Muslim league-nawaz has spent 25 billion rupees every day. The poor people of Pakistan are considered to be the winners. From the people of the country, the thinking of government houses starts from home and ends in the end of the house. Because the nation in which the forgiveness of the dead is the prayer of the mpa of the area If you do not know what you’re looking for, then you will be able to get rid of it. If you do not know what you’re looking for, then you will be able to get rid of it. If you do not know what you’re looking for, then you will be able to get rid of it. The swords of doubts hang. Recognize the inner… economic and social values will be the dust of your feet…

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COVID-19 cruelly highlights inequalities and threatens to deepen them

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In many countries, income inequality has risen steeply since the 1980s, with adverse social and economic consequences. The COVID-19 pandemic now cruelly highlights those inequalities – from catching the virus, to staying alive, to coping with its dramatic economic consequences.

Some groups, such as migrant workers and workers in the informal economy, are particularly affected by the economic consequences of the virus. And women, who are over-represented in the public health sector, are particularly exposed.

High levels of poverty, informality and unprotected jobs also make it more difficult to contain the virus.

Policy responses must ensure that support reaches the workers and enterprises who need it most, including low-wage workers, small and medium enterprises, the self-employed and the many other vulnerable people. 

Everyone is at risk

While some workers can reduce their exposure to the risk of contagion by teleworking from home, or benefitting from preventive measures, many cannot because of pre-existing inequalities.

Across the world, 2 billion workers (61.2 per cent of the world’s employed population) are in informal employment. They are more likely to face higher exposure to health and safety risks without appropriate protection, such as masks or hand disinfectants. Many also live in cramped housing, sometimes without running water.

This not only exposes these workers to health risks, it also makes preventive measures for the wider population less effective.

Getting sick means becoming even poorer

Inequalities also play out cruelly in what happens to people when they catch the virus.

For some it means going on sick leave, accessing health services and continuing to receive a salary.

But for those at the bottom of the income chain it’s a catastrophic scenario. Many are not covered by health insurance and face a higher risk of mortality. They may not even have access to health services.

Even if they ultimately recover, the absence of income replacement benefits means that they can become even poorer. Every year, an estimated 100 million people fall into poverty as a result of catastrophic health expenses.

The “work or lose your income” dilemma

Governments and central banks have adopted large-scale measures to save jobs and enterprises, and provide workers with income support.

Unfortunately, not all workers or enterprises benefit from these measures.

For informal economy workers, reduced hours, due to the pandemic, means loss of income with no possibility of receiving unemployment benefits.

Informal micro and small enterprises that constitute 80 per cent of enterprises worldwide are generally out of reach of public policies.

Part-time workers, many of who are women, temporary workers, or workers under short-term contracts and in the digital gig economy are frequently not eligible for unemployment benefit or income support.

Many of them face the same “work or lose your income” dilemma as informal economy workers. To pay their food and other basic expenses they often continue to work until forced to stop by measures to limit contagion by the virus. This compounds the economic insecurity they already face.

We need equitable and inclusive policy responses

In adopting short-term responses to the crisis, urgent attention should be devoted to protecting low-income households.

This means income support measures broad enough to cover the most vulnerable workers and the enterprises that employ them.

Italy for example extended income support (80 per cent of the gross salary) to workers in enterprises with financial difficulties, to all economic sectors and to enterprises with less than 15 employees, which are normally not eligible. Lump-sum income compensation is also provided to the self-employed and external collaborators.

Spain is providing income support for the self-employed, members of cooperatives and workers whose employment has been temporarily suspended, even if they would not have normally received unemployment benefits.

In developing countries, informality and limited fiscal space add to the difficulties. However, income support could be extended through non-contributory social security schemes or existing cash transfer programs. Support could also be offered temporarily to informal enterprises.

ILO

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