Eurozone Watch

The probable junior partner in Germany’s new coalition, the liberal FDP, on Sunday reached a historically strong result with around 14.6 percent (estimate of 11:54 p.m.) of the votes. For the first time in eleven years, it is set to join the federal government. Given its strong result, FDP chairman Guido Westerwelle will reach out for key portfolios in the upcoming coalition negotiations, including some which play a role in key matters of Germany’s European affairs. Traditionally, the smaller coalition partner in the German government takes the Foreign Ministry. The FDP chairman is hence seen as the most likely candidate for the post of the foreign minister and was actively promoted by senior FDP party figures on election night.

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In a new publication for the American Institute of Contemporary German Studies (AICGS) at the Johns Hopkins University in Washington, D.C., I argue that no matter who is going to win the election in Germany in September, Germany will continue to be an obstacle to the reduction of global imbalances. The new constitutional rule on the limits on government borrowing as well as the frame of mind of the main policy makers means that the world will not see a sustainable revival of domestic demand growth in Germany, but a continuation of the Mercantilist strategy of the past decade. You can download the full analysis from the AIGS's website here.

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The German Foreign Secretary and social democratic candidate for the Chancellors office in the next general elections in September 2009 has finally formulated some ideas on the future of Eurozone governance. Unexpected by many who had given up hope that the SPD candidate would pronounce himself on this matter before the European and German elections, he devoted 10 lines of yesterday’s speech in Budapest to EMU – and has departed in at least six aspects from the position on EMU the grand coalition has been holding before and during the current crisis.

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Fourth part of our series on the winners and losers of the current crisis

Before the financial crisis struck, the German finance minister Peer Steinbrück had a very ambitious goal. He wanted to enter history books as the finance minister who managed to oversee the first federal budget in Germany without new borrowings in a generation.

This dream is now shattered. As the Financial Times Deutschland pointedly remarked a few weeks back, Mr. Steinbrück is now entering history books as the finance minister who has overseen the largest federal budget deficit ever: With the government's stimulus package of about €50bn, the German government is now set to borrow as much as never before in euro terms.

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Last Monday, French President Nicolas Sarkozy once again pushed for an old French idea, the "gouvernement économique" for the Eurozone. In his speech in front of the European Parliament, the acting EU Council President reinterated the French quest that the governance structures of the European Monetary Union should be strengthened in order to allow for more politics in the management of the Eurozone economy.

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3rd part of our series on the EU after the Irish No to the Lisbon Treaty  

The economic outlook for the euro area is deteriorating fast: This week has brought a number of new indicators pointing at a sharp slow-down ahead. Not only are signs mounting that the first countries on the fringe of the euro area such as Ireland and Spain may now be in recession, but there are now also some first indications that Germany, long seen as the most robust economy of the euro area at the moment, is also heading for a significant slowdown. Negotiations on an new protocol to complement the Lisbon Treaty or on a revised version of the Treaty will hence take place in a difficult economic setting. This could turn out to be particularly problematic for Ireland, which may face a second referendum on the Lisbon Treaty.

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Last Friday, Ulrich Fritsche and I presented the results from our analysis of unit labour costs in EMU compared to regional unit labour cost developments at a workshop in Cambridge (see paper here). When we remarked that Portugal had lost roughly 17 percent competitiveness between the start of EMU and 2006, more than has been ever observed in any German Land or US state within any 8-year-period, one discussant remarked that Portugal has actually improved competitiveness in 2007 and is set to do so again in 2008. So, is Portugal actually turning the corner after years in the doldrum?

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Today, GDP figures for Germany, France and the Euro-area as a whole were published. While the figures by itself might have been distorted by some one-off factors, the underlying divergence in the data is rather frightening. What has for quite a while been one of the top issues on Eurozone Watch is increasingly taken up by bank analysts: The growind divergence within EMU.

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Over the past week, the German economy has shown first real signs of an economic slow-down. Data from the labour market has been much less upbeat than before. Yesterday, also manufacturing orders took a hit, pointing to a further growth moderation starting in the second quarter of 2008. The strong euro and the investment backlash from the tax reform enacted on January 1 of this year are finally felt in the economy.

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The French Finance Minister Christine Lagarde last week announced that Paris would use its Presidency of the European Council starting on July 1, 2008 to push for a common corporate tax base. Despite its looks, this is yet not another brand new initiative by Nicolas Sarkozy – in addition to the other French EU Presidency priorities in the fields of European Security and Defence, Environment/Climate Change, Energy, Immigration and the Union for the Mediterranean.

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