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Economy in Brief

Does German Success Threaten Its Prosperity?
by Robert Brusca  January 28, 2015

German consumers in February are feeling great, according to GfK. German confidence is on the rise and consumer climate is on a new high in February, according to the forward-looking GfK measure. The rest of Europe is struggling. Italian and French confidences are striving to attain or to beat `middling.' Greece is making demands to renegotiate its debt again. Risk mutualization has stopped as the new ECB program will pit every central bank for itself in a coordinated program of new stimulus in which each bears the risk of its own actions.

Meanwhile, the German government has lifted its outlook for German growth in 2015. Growth is now supposed to hit 1.5%, up from an estimate of 1.3% previously. German GDP grew 1.5% in 2014.

The ECB is trying desperately to stimulate the euro area. Most are skeptical that QE is quite the right plan but it's all Europe has got. The European market is festooned with universal banks. Their structure and presence has kept the development of a real securities market at bay. The ECB will find when it sucks paper out of financial markets (or rather when the various national banks do it) they will be thrusting the universal banks into the lime light. And these are the same banks that the ECB is leaning on to raise more capital. The idea that large scale asset purchases (LSAP) will remove high-rated paper from markets and `force' investors to undertake more credit risks resulting in stimulus is laughably unrealistic for Europe. With one hand the ECB beckons the universal banks to lend; with the other it punishes them for doing it too aggressively. The ECB is both `good' cop and `bad' cop. The policy is sure to flop. Interestingly, no discussion of European QE has linked it to the contradiction of its regulatory stance.

Meanwhile, as the ECB policy goes full tilt for stimulus, Germany is reawakening from its year of suffering a sucker punch from the troubles of the EMU and the sanctions on Russia. The falling euro exchange rate will play right into German strengths in the export market. But this highly stimulative policy for Europe, which may not work, is way too much stimulus for Germany. It could prompt even more German fiscal tightening to combat the unwanted stimulation. While the rest of Europe will be trying to make fire from the ECB's sparks, Germany's economy will be roasting as the already virulent heat is turned up another notch. For once the excess of the ECB's policy may fall hardest on Germany without much recourse since the ECB is so far under its objective for inflation. The ECB's policy will now be geared to the needs of the rank and file EMU members not for Germany. German inflation- even overheating inflation- will only help to push the ECB a bit toward its policy goal, a goal which it has been missing for some time. Of course this is not in train yet as German inflation is still low but is no longer the lowest in the EMU.

German consumers are feeling great. The German surveys from ZEW and Ifo are starting to turn up again. The question for Germany is not if it is doing well but if it will do too well in this environment. The ECB was adapted to run a one-size-fits-none monetary policy. Now with so much change a foot European austerity has wreaked havoc on the euro area and thrust it toward deflation prompting some heretofore unanticipated policy moves. Germany, while still in the catbird seat for growth, may find that seat is getting too hot for comfort in 2015. Who thought you would read a report about economic overheating for 2015? Well, it is very local, but here it is.

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