Connect with us

Economy

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

Published

on

“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

Continue Reading
Comments

Economy

Doing Business Report 2020: Soaring Changes with Soaring Doubts

Sisir Devkota

Published

on

As Narendra Modi brands his government of making new leaps; similarly, the World Bank’s annually published report, “Doing Business” has largely become a tool to evaluate economies. Both Mr. Modi and the institution have things in common. Upon his election in 2014, the Prime Minister made it clear that India was going to climb the rankings under the same report. This year’s report insists that many countries, including India, have made good leaps. Amidst such table success, there are many questions over the serviceability of the report itself. For a start: consider why the subtitle of Doing Business 2020 is “Comparing Business Regulation in 190 Economies”.

Nevertheless, many leaders like Mr. Modi are lurking towards performing the charts. Perhaps, a psychological competition engulfs bigger nations like India. Kosovo and Cyprus are ahead of Mr. Modi’s people in terms of the ease of doing business. Adding fuel to the insecurities, the report also highlights a fact-based decrease in the cost of starting new businesses in developing countries. Unquestionably, nation states are in a race. Whether investors investigate such results is an altogether different case.

One example is how the report has defined entrepreneurial ease to tackle obstacles. The 2020 report claims that more than fifty-five economies have eliminated the need to pay minimum capital amount to start a new business. Such rate of change will raise eyebrows; history suggests that often, openings like that are a result of financial desperation. Clearly, there is a lack of something in the stated fifty-five economies; investors will hope that it is not market demand. Retrospectively, besides how institutions like the World Bank or the charming speeches of leaders like Modi would imply otherwise; investors will be careful of such data. After all, there is a huge difference between an easy business environment without any scope and a conducive environment with healthy competition. Because the report also suggests that many nations instead reduced the cost of capital launch; economists will be doubtful in even trying to handle such information. It will be left to seen whether the report will also affect the nature of successful markets and goods.

Similarly, 40% of low and middle-income nations now prohibit the use of fixed-term contracts for permanent jobs. The staggering changes this year is a news that is too good to be true. Assumedly, as the report claims, if there are more nations relaxing business operations with such contract policies, investors will be smelling early blood. If anything, a logical analysis only implies that there is wishful thinking in the academics of the report to transfer wealth into hungry mouths. Pragmatically, the huge numbers do not present opportunities. Instead, it is calling for a discomforting nature of risk in many countries.

For some amount of comforting information, the 2020 Doing Business report, maintains ease of government contractas an indicator of looking at the bigger picture. As much as the knowledge of how long it would take to acquire government contracts in Chile would be useful for aspiring Chinese companies; it misses the main point. How would investors weigh their decisions in nations with contradictory results along different indicators? The lack of comprehending such result for economic decisions, is a liability than a tool. New Zealand has been a consistent performer for years, and, for 2020, it is also ranked as the best place on earth for doing business. Somalia, on the other hand totters at the end. It has been tottering for many years now. A strange movement of middle rankers become sensational news. Like Mr. Modi, many leaders are not looking to upset high ranking nations, instead, in the most explicit form of political accomplishment, lies the aimless ambition. Narendra Modi will be most excited, he knows that another addition of electrical grids in rural India will soar the rankings again, next year.

Continue Reading

Economy

BRICS acts as a collective will to safeguard global multilateralism

Published

on

Authors: Zhou Dong chen &Francis Kwesi Kyirewiah*

On November 13-14, the 11th BRICS Summit was held in Brasilia, capital of Brazil, where Chinese President Xi Jinping alongside the leaders of Russia, India, South Africa and the host country—Brazil—met and discussed the issues of global and regional dimensions. According to the data in 2018, the BRICS member states have already accounted for 23.6% of the world economy (GDP) and nearly 20% of all world trade, in addition to contributing more than half of all global economic growth. Now, as it enters the second decade of cooperation, BRICS aims to enhance intra-bloc cooperation covering all economic, political and security cooperation as well as cultural and people-to-people exchanges. Can the BRICS members stand together in international affairs?

The concept of the “BRIC” came to the limelight in 2001. Since then, it is argued that the relative size and share of those countries in the world economy has risen exponentially, and most likely it would gradually imply that the G7’s economic hegemony would be rearranged. Scholars like Dominic Wilson further echoed this in his study on “Dreaming with BRICS: The Path to 2050”. He put it that, in all likelihood, by 2025 the BRICS could account for over half of the size of the G7 in terms of GDP. And in less than 40 years the BRICS’ economies together could be larger than the G7.

Although it was debatable, the key assumption behind all the discourse is that China and India have risen as the world’s principal suppliers of manufactured goods and services, while Brazil and Russia are already becoming equally dominant as suppliers of raw materials.In addition, what the BRICS have in common is that they all have an enormous potential consumer market, complemented by access to regional markets and to a large labor force. Wilson argues that three key issues the BRICs have to embrace for their partnership development are as follows: Inclusive growth, sustainable solutions and foreign policy consultations in the post-Western world. Echoing his discourse, Andrew Hurrell put it, “since all the BRICS nations are now members of the G20 which is a major symbol of the structure of global governance, the bargaining power of the BRICS vis-à-vis US-dominated global institutions is inevitably growing.”

It is quite coincident that during the 2017 G20 Summit in Germany, the leaders of the BRICS held an informal meeting reaching key agreements on building an open world economy and improving global economic governance. On the occasion, Chinese leader called on that the BRICS itself would establish an open economy, maintain a multilateral trade system and advance inclusive, balanced and win-win economic globalization with a view to making the fruits of economic growth accessible for all people. There is no doubt that the BRICS countries also have their own internal challenges and external divergences on many issues. Yet, the central point of the role of the BRICS in global affairs is not where the world order is now, but where it will be in the near future, say by 2050.Building on the common sense that “a shared voice is stronger than a single shout”, the emerging powers are well-aware of the closer cooperation among them and even beyond in order to push forward their own agenda.

Yet,  no matter which theory, realism or constructivism, is used to assess the BRICS, it is unlikely the bloc having moved to a geopolitical organization like NATO, but only a new-typed geo-economic forum that incorporates a strong component of people-to-people relations between institutions and individuals. Two of its main goals are as follows: to bring people closer together through socio-economic means, and to take a constructive part in settling geopolitical flashpoints. As such, the BRICs is generally regarded inclusive and its members are willing to cooperate with other countries or institutions that share their interest in making the world a fairer, and therefore a better place. In line with this spirit, the BRICS, though a grouping of five major emerging national economies, aims from its inception to establish an equitable, democratic and multilateralism-based world order.

If the first decade of the BRICS has formalized its existence and also represented many opportunities for the 21st century, the key concern remains how to turn the bloc into a functional grouping rather than just a global forum in the next decade. Strategically, it is vital for the BRICS to become a knowledge base for other developing countries, such as the areas of solar energy, ethanol products, urban landscape development, slum alleviation and biotechnology use, and share their best practices with southern countries. To that end, it is essential for the BRICS to act and talk differently from the G7 and other Western institutions, which are deemed to retain economic hegemony over the vast developing areas. Put it more bluntly, the BRICS should be committed to multilateralism, human development and social welfare in accordance with UN charters and the relevant resolutions.

Given this, looking ahead into the next decade, the BRICS is supposed to follow this line as proposed by Xi when he addressed the current global challenges such as unilateralism and protectionism, and he called on BRICS countries to champion and practice multilateralism. Thus he put three-point suggestions as follows: first, he urged the five members to safeguard peace and development for all, uphold fairness and justice and promote win-win results. Globally, it is vital for the BRICS to uphold the purposes and principles of the UN Charter and the UN-centered international system, which rejects any sort of hegemonic order and power politics and take a constructive part in settling geopolitical issues.

Second, the BRICS en bloc should pursue greater development prospects through openness and innovation. Therefore, it should uphold the WTO-centered multilateral trading system and increase the voice and influence of emerging markets and developing countries in international affairs. In addition, BRICS member states should prioritize development in the global macro policy framework, follow through the UN 2030 Agenda for Sustainable Development and the Paris Agreement on climate change. All in all, the BRICS makes all efforts to promote coordinated progress in the economic, social and environmental spheres. Third, in a long run, the BRICS needs to be more proactive in promoting mutual learning through people-to-people exchanges and take their people-to-people exchanges to greater breadth and depth. Xi did indeed appeal to other four partners that “BRICS Plus” should serve as a platform to increase dialogue with other countries and civilizations to win BRICS more friends and partners.

This is a truly strategic proposal. People agree that the next decade will see accelerating change in global patterns of economic growth, development, and governance. The BRICS can achieve a second golden decade if they can remain united and work together in the face of the challenges and opportunities to come. Although all BRICS members have no intention to challenge the status quo which is still dominated by the U.S.-led globalization system, the first decade of self-discovery of the BRICS has paved the way for the second decade of confident outreaches to other countries and institutions and will predictably see the new bloc becoming a powerful global platform for change by 2029.

In summary, the huge potentials of the BRICS are far beyond the current five powers. In effect, Valdai Club, a Russia’s top think tank, once put it, the BRICS starts by bringing together the regional integration groups that each country is a part of (e.g. Russia, the Eurasian Economic Union, Brazil and Mercosur) through the BRICS+ framework in order to broaden its reach in the most realistic way possible without overextending itself. In view of its one-decade vicissitude, it can say that this visionary outlook is definitely doable since all the BRICS members certainly have the political will to pull it off, plus their combined economic power is attractive enough to naturally make their counterparts interested in cooperating. The BRICS could therefore transform into the core of a larger global reform structure bringing together non-Western countries and even those within the West that are dissatisfied with the U.S.-led status quo, which would then enable it to truly become a global force capable of carrying out meaningful development governance. It has actually exercised a positive impact on each of its five members, so it’s time to spread the benefits beyond the original five. Considering the second decade of its development, the BRICS would aim to make further reform in terms of the fairer governance.

*Francis Kwesi Kyirewiah, a PhD student in International Affairs, at SIPA, Jilin University, China.

Continue Reading

Economy

CHETRA Eyes Africa for Expansion

Kester Kenn Klomegah

Published

on

CHETRA is a Russian company that sells industrial equipment and spare parts under the brand “CHETRA” produced by the Promtractor plant, as well as supplies spare parts and components from the company. It uses a unique technique in the construction of production sites, seaports, development of natural resources and pipelines in 30 countries and in all climatic zones.

The goal is to provide its partners and customers with modern high-performance equipment for successful projects, even in areas with complex climatic and geological backgrounds. More than 3,000 units of equipment under the brand “CHETRA” are now in operation in the Russian Federation and beyond.

Executive Director Vladimir Antonov has been working in engineering industry for 19 years. He has successful experience in product export to the CIS countries and Ukraine, the Baltic States, Europe, Argentina, Africa and Cuba. He has been leading company as its Executive Director since 2018. During his leadership, the share of the company’s machinery in the Russian market has doubled.

In this snapshot interview, Vladimir Antonov talks about his company’s plans in the direction of Africa. Here are the interview excerpts:

Q:First, tell us briefly about tPlants previous working connection with Africa? What are your products and services, what African regions or countries are keen using products?

A:Our company has a long experience of cooperation with African countries which began in the Soviet times and continues today. Traditionally we collaborate in the African continent with such partner countries of Russia as Egypt, Algeria, Zimbabwe. About 50 units of CHETRA machines have been supplied to these countries over the last ten years. Our goal is to enlarge our footprint in the African continent. Nowadays, we are negotiating cooperation with potential partners in West Africa and the SADC region (Southern African Development Community, South Africa).

Q:Compared to other foreign players, how competitive is the African market? From the previous experience in the African regions, what key problems and challenges the company faces in Africa?

A:Today the market of mining and construction equipment in Africa is characterized by high competition, all our competitors work in the region, both from the West and from the East. This has led to the fact that the market applies high requirements to new products. For that reason today we do not just sell our machines to customers: we offer a range of services, which includes commissioning of the machines, training of local staff, organization of after-sales maintenance service at the customer’s site. The main challenge for us today when working in Africa is the need to find a local partner who has qualified staff, equipment, maintenance facilities and not bound by contracts with other manufacturers of similar machines.

Q:What kind of business perceptions and approach could be considered as impediments or stumbling blocks to business between Russia and Africa?

A:Another challenge for us when working in Africa is that many consumers have no free funds to purchase new machines. This often diverts our partner from the renewal of the fleet or makes them buy used machines on the after-market. We are trying to solve this problem by attracting Russian government agencies of export support, such as the Russian Export Center, in order to finance transactions. 

Q:Business needs vital information, knowledge about the investment climate and so forth. Do you think that there has been an information vacuum or gap between the two regions?

A:Taking into account the level of development of information technology today there are no particular problems in obtaining information about the investment level of any country or about business situation of a particular company. Besides that, we are in constant contact with Trade missions at the Embassies of the Russian Federation in the countries of our interest, which are also a good source of information about the conditions of the market.

Q:And now how would you envisage the level of investment and business engagement with Africa? Is Sochi an opportunity for expanding business to Africa?

A:In my opinion the Economic Forum in Sochi was organized at the highest level. A lot of guests from Africa visited it. We held a number of meetings with companies that are new to us, and I hope that these will lead to long-term cooperation and geographic growth of supplies of CHETRA machines in Africa.

Continue Reading

Latest

Trending

Copyright © 2019 Modern Diplomacy