Fragile boom A Tale of Two Economies

A major report suggests the German economy is unbruised amid dynamic challenges. Meanwhile a key German central banker warns that the situation in Greece is still troubled – and urges compromise before it is too late.
A fragile situation for Europe, but for the moment Germany is chugging along just fine.

As the dust settles from a dramatic Greek election over the weekend, it’s crunch time for Athens and its creditors. Germany, its largest creditor, seems unbruised so far by the turmoil.

With a new government sworn in under the anti-austerity Syriza party leader Alexis Tsipras, tense negotiations can now begin between this struggling southern European nation and the wealthy northern European creditors, led by Germany, that have backed it with some €250 billion in rescue loans.

Jeroen Dijsselbloem, who serves as the representative of the euro zone’s finance ministers, will travel to Athens on Friday to get the ball rolling. The two sides begin the talks very far apart – Mr. Tsipras is demanding that a portion of Greece’s public debt be forgiven, while his creditors have said this is not on the cards.

The time for negotiation is shorter than many policymakers might think.

Should the continuation of the Greek rescue program be put in doubt, it could endanger monetary refinancing. Joachim Nagel, Bundesbank board member

Joachim Nagel, a board member of Germany’s central bank, the Bundesbank, urged a quick compromise in an interview with Handelsblatt. He warned that a failure to keep a rescue program going could leave the European Central Bank with no choice but to pull the plug on Greece’s banks.

“Should the continuation of the Greek rescue program be put in doubt, it could endanger monetary refinancing. This would have fatal consequences for the Greek finance system. The Greek banks would then lose their access to central bank money,” Mr. Nagel said. “One is starting to get the impression that this connection is being underestimated.”

Mr. Nagel also categorically ruled out the central bank participating in any debt forgiveness for Greece, mirroring comments by the ECB’s executive board member Benoit Coeure on Monday. “Relinquishing demands for repayment would amount to state financing and therefore a break with the E.U. treaty,” Mr. Nagel said.

This presents a major problem for Greece, since a big part of its annual bill goes to the central bank. Athens is reportedly paying interest of more than €10 billion per year to the ECB, which bought Greek debt on the open market at the height of the euro zone’s debt crisis, and the International Monetary Fund (IMF), which participated in the euro zone's bailout program. The ECB legally can't reduce what it is owed, and the IMF has so far refused.

By contrast, the interest payment on the loans Greece has received from other euro zone countries is minimal – less than €1 billion combined for a series of bilateral loans and aid from the euro zone’s firewall, the European Stability Mechanism. The rest of the payments have been deferred - much of it to 2020 or later.

Greece’s existing rescue program runs out in February – failure to reach any kind of deal by then could force the country into bankruptcy.

Supporters of Greece's Alexis Tsipras hope he can relieve the burden on Greece's poor.


While the Greek election may have plunged Europe back into crisis mode, it seems that Germany, Europe’s largest economy and Greece’s biggest creditor, is chugging along just fine.

The IFO research institute, one of the country’s largest economic think tanks, released numbers Monday stating its employment barometer had risen to 108.2 points in January, the highest in nearly three years.

The survey, done exlusively for Handelsblatt, rose this month despite the negative effects of a minimum wage, which came into force this month, a first for Germany and something which many had feared would further dampen employers’ readiness to take on workers.

“Thanks to the improving business climate, more and more companies are employing increasing numbers of staff,” said IFO economist Klaus Wohlrabe.  The employment barometer is based on responses from 9,500 companies.

The improvement is mainly thanks to the German service sector which is developing along the lines of the United States and United Kingdom - Germany, long a manufacturing powerhouse, is now also selling more services.

The rosy jobs outlook is expected to be confirmed later today. Economics Minister Sigmar Gabriel is expected to forecast a record improvement in employment to 42.8 million for 2015, according to Reuters. This would mean unemployment falling by another 40,000 over the course of this year.

Germany introduced a minimum wage on January 1 this year but the IFO institute warned last spring that this could cost 200,000 jobs in the first year. The barometer’s improvement is therefore an initial salve to those who feared this would dampen employers’ readiness to take on staff – though time will tell if this remains the case for the rest of the year.

On Thursday, Germany’s federal employment agency will present developments on the employment market for the month. As in other years, unemployment is expected to be marginally higher at the start of the year. But alongside the increased confidence, mild weather has led to an unusually small rise in joblessness.

“Unemployment is likely to fall further in line with seasonal trends,” said Enzo Weber, of the Institute for Employment Research which is associated with the employment agency.

Compare that with Greece, where more than a quarter of the population is out of work.

Mr. Tsipras has promised a major upgrade to social programs for the poor, for example offering free electricity and cheap heating oil for 300,000 of the poorest families. He also wants to introduce more food stamps, free rides on public transportation, higher pensions and free health care for those who can’t afford it.

Greece’s Syriza party estimates the costs of its social programs at €11 billion. The Greek finance ministry in a study ahead of the elections put the total cost at €27 billion – about half of Greece’s total tax intake last year.

The question for Mr. Tsipras is how exactly he expects to finance his electoral promises. For the moment, he hasn’t even accepted the troika of the European Commission, ECB and International Monetary Fund as acceptable negotiating partners.

Whether Germany can do much to ease the situation remains unclear, but a deal by the end of February will be critical.


Jan Mallien and Jan Hildebrand cover politics for Handelsblatt. Axel Schrinner writes about financial and fiscal policy for Handelsblatt. Ruth Berschens, Gerd Höhler and Christopher Cermak contributed to this article. To contact the authors: [email protected], [email protected], [email protected]