German Climate Improves

The estimate of German consumer confidence in March has moved higher, according to the research group GfK. At a level of 8.5 Germany's consumer climate was last higher in January 2007; it was above its current level for a period of five months. This is rarified territory.

Expectations for the economy, the propensity to buy, and income have continued to move higher. The propensity to buy index and the economy index each have been locked in solid uptrends, but they each backtracked in February, their most recent observations. Income gains continue to power ahead.

To evaluate the standing of the level of these various indices, we place them in their proper percentile in their historic queue. Climate stands in the 95.5 percentile; it is higher less than 5% of the time. Income is even stronger than this. While it lags one month, the income metric is in the 99.2 percentile of its historic range; it is higher less than 1% of the time. The propensity to buy index despite its setback in February stands in the 92.5 percentile of its historic range. It is the economy index that is lagging the other components. The economy index took a setback in February, but February compared to December still represents a strong gain. The level of the economic index in February is an 80.5 percentile standing. The economy has been viewed as being better than this only about 20% of the time. That would still leave room for improvement, unlike the other components, unless they are going to reach new heights. On the whole these are strong readings for Germany and with solid momentum in the component series, despite the high level of these readings.

We have three other countries with which to compare consumer confidence; two of them are members of the European Monetary Union and one is not. The UK is not part of the single currency arrangement, but its consumer confidence index stands in the 98.5 percentile of its historic queue. Italy and France are in quite different shape. Italy's standing is in the bottom third of its range along with France. The precise standing for consumer confidence is in the 30.3 percentile for Italy, while for France it is in the 31.1 percentile. These are huge differences with Germany and are more characteristic of where other EMU countries stand compared to the German level.

As we continue to say, one of the challenges affecting the euro area is reducing the differences among member countries. Since there is one currency and since there is one monetary policy, the more deviation there is within the monetary union, the less effective monetary policy is going to be. One of the reasons for this deviation among members has been their different views and differing degrees of reliance on fiscal policy. We reported yesterday that the new German data on the Maastricht criterion leaves Germany at the 0% level in the prescribed scheme. Meanwhile, other European countries rank much higher on the debt/deficit metrics. Some of them have been the laboring under conditions of austerity that have not altogether improved their debt to GDP ratios, largely because austerity, while containing debt, has also reduced GDP. Austerity has been a dubious weapon to use to fight debt and deficit excess (relative to GDP).

As the euro area prepares to advance in the recovery stage, after a long and difficult recessionary episode, its members need to decide how they will deal with these lingering differences among countries. Clearly, differences in competitiveness among member countries have developed due to huge divergences in national inflation rates since the common currency was formed. There already are some growing pains in terms of trying to get banking regulation in place and yet to allow for local differences, customs and practices, and lending mechanisms. Debt loads, as we just mentioned, are uneven. Europe continues to struggle with these issues and yet it must come to terms with them before it can be truly successful.

The German consumer confidence data today should put to rest concerns that Germany has been backsliding. However, there is no doubt that parts of the German economy have slowed their rate of progress. In the end, Germany is part of the euro area and problems for fellow members become problems for Germans. At some point, that will become an issue for Germany. When you are all in one boat, a hole in the starboard side is a worry even you may reside on the port side.