Andreas Dombret: Current developments in Germany and Europe
Welcome address by Dr Andreas Dombret, Member of the Executive Board of the
Deutsche Bundesbank, at the reception for the outgoing Deputy Head of the Representative
Office of the Deutsche Bundesbank, New York, 24 August 2011.
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1 Introduction
Ladies and gentlemen
For more than four years we have been facing an unprecedented crisis, which has
sometimes led to high levels of uncertainty. I will start my short speech with some information
on the current situation in Germany and Europe before returning to the individuals and their
role in transmitting such information. Let me stress in this context that it is a pleasure to be
meeting all of you today and to have this opportunity to improve our transatlantic
relationships and to exchange views later on.
2 Current situation in Germany and Europe
As I mentioned, we have been living in the face of an extraordinary crisis for more than four
years. Having originated from the American housing market, this crisis quickly spread to the
global financial markets. It caused a severe recession of the real economy and eventually led
to an erosion of confidence in the public finances of various countries. In the wake of debt
problems and amidst worries about the state of the global economy, we have seen renewed
market turbulences over the past weeks. However, looking at the underlying development of
the real economy, the situation in Germany and the euro area is not as dire as these
turbulences might suggest. Let us begin by taking a look at the situation in Germany.
GDP as the most general indicator of a nation's economic performance has broadly
recovered. During the crisis the German economy shrank considerably; in 2009 alone, GDP
contracted by 5.1% - by far the most severe downturn for more than half a century.
However, in 2010 and the first quarter of 2011, the German economy recovered strongly and
the level of economic activity has almost returned to pre-crisis levels by now. These strong
dynamics seem to be contrasted by the first estimate of GDP growth in the second quarter of
this year which revealed an increase of just 0.1% compared to the first quarter. Nevertheless,
this pronounced drop in the growth rate does not come as a surprise and should be no cause
for concern: the strong expansion we saw in the first quarter was in part due to catch-up
effects, since the last quarter of 2010 had been adversely affected by an exceptionally cold
winter. Hence, a certain backlash in the second quarter was to be expected, and in its recent
June forecast the Bundesbank actually predicted a growth rate of 0.1% in the second
quarter. This suggests, of course, that the GDP growth figure for the second quarter
understates the underlying cyclical momentum. As for the remainder of the year, recent
leading indicators suggest a continuation of the upswing, albeit at a more moderate pace
than before.
To be sure, despite the relatively benign outlook some risks remain. These include
uncertainties regarding the US economy, a potential cyclical slowdown in emerging markets,
uncertainties in financial markets and the continuing debt problems in a number of countries.
However, in Germany these less favourable external conditions are contrasted by more
encouraging internal dynamics. Thus, the recent slowdown is no indication that the German
economy has been affected by the increased uncertainty, and according to our forecast the
German economy will grow by 3.1% in 2011.
This rather positive impression is confirmed when looking beyond GDP growth at other
economic indicators. In particular, the German labour market presents a bright picture. It
fared unexpectedly well during the crisis and moreover has recovered rapidly. This year,
unemployment has reached its lowest level since the beginning of the 1990s. The current
unemployment rate stands at 7.0% and employers' willingness to recruit staff is still very
high. Given that the slump in 2008 and 2009 was mostly due to a cyclical shock, the labour
market profited significantly from previous bold reforms, which had modernised the labour
market structure. These structural reforms paved the way for further necessary market-based
corrections, for example in wage setting and intra-plant working-time flexibility. Given these
circumstances and the still favourable outlook for economic growth, we expect
unemployment to fall to 6.5% in 2012. The strong performance of the labour market is one
important reason why we expect domestic demand to contribute significantly more to growth
than in the past.
Turning from Germany to the euro area as a whole, we find a mixed picture in various
respects. Overall, we still see a positive underlying momentum of economic activity.
However, the underlying trend may be overstated, as the strong growth we observed in the
first quarter was partly due to extraordinary factors. In line with this observation, GDP growth
slowed down in the second quarter: according to Eurostat's first estimate, euro area GDP
increased by a mere 0.2%. Regarding the further development, signals are mixed at the
moment: while recent polls showed that expectations have dampened, current data reveal
that orders in the industrial sector increased significantly. Overall it seems that, in line with
previous expectations, the euro area economy will continue to expand over the rest of this
year, albeit at a moderate pace.
A glance at the labour market in the euro area also reveals an uneven picture: recovery had
already been tentative before and slowed down further in spring. Overall unemployment in
the euro area currently stands at nearly 10%, while the individual rates range from 4.0% in
Austria to as much as 21% in Spain. Finally, consumer prices have been rising over the past
months, and although the increase has slowed down somewhat of late, current inflation
stands at 2.5% - clearly above the Eurosystem's 2% definition of price stability. To prevent
second-round effects and to ensure that inflation expectations remain firmly anchored, the
Eurosystem has raised interest rates twice this year.
3 Challenges in the euro area
The major risk for the euro area is probably the uncertainty resulting from the debt crisis in
Greece and some other member states. However, in mid-July, policymakers agreed on an
all-encompassing package to stabilise the situation. First of all, it is important to keep in mind
that the situation in Greece is exceptional in various aspects, and for these reasons the
measures taken should not be extrapolated to other member countries. Furthermore, from a
central banker's perspective, it is to be welcomed that the European Council announced its
intention to ensure sufficient capitalisation of banks and adequate collateral. For the
Eurosystem's refinancing operations, solvent counterparties and sufficient collateral are
crucial.
When I mention counterparties, please allow me to briefly address one current point of
interest in financial markets on both sides of the Atlantic: US dollar funding of European
banks. This is certainly an area that relevant authorities, including the Bundesbank, monitor
closely. But let me offer you some assurance about the current situation - in particular, of
course, from the German point of view. Without a doubt unsecured US dollar funding
markets have tightened somewhat recently. For example, US money market funds, which
account for a non-negligible but small part of European banks' short-term liabilities, have
become more selective when providing funding to non-domestic banks. But let me
emphasize that we are very far away from the situation we witnessed in 2008. First, liquidity
needs can be covered by a number of other means including secured funding with repos.
Second, if need be, the ECB stands ready to mitigate potential bottlenecks, based on the
swap agreement in place with the Fed. Third, the lion share of German and other
European banks have used the rather benign market conditions in the first part of this year
and have completed an over-proportional part - or even all - of their overall 2011 funding
needs in the capital market segment. And let me make a final important point here: European
banks, in general, have considerably improved their capital base making them less
vulnerable to financial strains. Speaking about German banks, the Tier 1 capital ratio
currently reaches 12.6 % on average, having improved by about three percentage points
between the end of 2008 and June 2011.
But let me return to the bigger picture. It has to be kept in mind that the sovereign debt crisis
and, indeed, challenges we face in parts of the European banking system can ultimately only
be resolved by ambitious and credible fiscal policy measures, particularly in the countries
whose fiscal soundness is being questioned. Conversely, it is imperative to very clearly
separate monetary policy from fiscal policy. Wherever the boundary between the two has
become blurred, it must be redrawn as quickly as possible.
4 Conclusion
Ladies and gentlemen
Let me conclude by stressing the importance of the work done by our Representative Office
in New York. As I see it, there are two main functions that this office serves. First, it gives us
an opportunity to further explain policy decisions and economic developments in Germany
and the euro area on this side of the Atlantic. Second, and for us even more importantly, our
New York office reports back to us, in particular, on monetary policy and financial stability
issues as well as financial markets developments. Through the financial crisis, in particular,
we have seen the significance of directly exchanging information with our colleagues at the
Fed, with representatives of commercial banks, policy makers, think tanks and market
participants. It allows us to better understand political and economic developments in the US
and we are much more in a position to separate noise from significant market developments.
Our team here in New York is doing an excellent job identifying and communicating key
developments in the US back to Frankfurt. This, I suspect, would not be possible without the
support of everyone present here tonight.
Finally, one great side-effect of having people work at our Representative Office is that they
become even more valuable when they return home. As you know, Felix Thierfelder has
worked at the office over the past three years, which were marked by the financial crisis. He
has gained significant experience during this time. We are glad that he is now returning to
our Central Office as a staff member in the Financial Stability department. Mr Thierfelder will
be responsible for setting up new market contacts and intensifying our existing ones. With
the creation of this new post we hope to be better positioned to identify key risks to financial
stability early on. It also testifies to the importance we attach to exchanging views with
market participants.
Feline von Heimburg has also been monitoring the development of the financial crisis when
working in the Financial Stability departments of both the Deutsche Bundesbank and the
European Central Bank. She will now be able to employ the experience she gained in
Europe in the more hands-on environment of the Representative Office.
Let me now thank Felix Thierfelder for his work over the past three years and welcome
Feline von Heimburg as his successor. I wish both all the best for the future.
Thank you very much for your attention.