Future is blue 18/11/19

Carlos Carnicero Urabayen

18 de Noviembre de 2019, 13:34

Good morning Future is blue readers,

this week we are analysing the implications of Germany avoiding a recession thanks to tiny growth in the third quarter (0,1%).  We have reached out to Zsolt Darvas, Senior Fellow at Bruegel, for some answers on what this means for Germany and Europe’s economy. As usual, you can see below what we are reading these days.

Future is Blue has reached an editorial collaboration agreement with academic journal 'South European Society and Politics' by Taylor&Francis Online. Our readerswill have free access to an article of each quarterly issue of the journal. 

Enjoy the reading and the sun if you can!

Zsolt Darvas, Senior Fellow at Bruegel: "I expect weak growth in the euro area for some years to come"

Germany has narrowly avoided recession. Europe’s largest economy grew by 0,1% in the third quarter of 2019, challenging expectations of a second contraction in a row. Higher spending by households and the government offset a downturn in its export driven manufacturing sector. 

These data put Germany below the UK, the US and France on global growth. What are the implications for Germany’s economic model and Europe’s economy?

We’ve reached out to Mr Darvas for some answers. 

Raymond Torres: It seems that the German economy has avoided a recession. Do you think that a recovery is underway? How much fiscal stimulus is still needed?

Zsolt Darvas: Any potential growth estimate for Germany is closer to 1% than to 2%, so a slowdown from the 2.5% growth rate is 2017 should not be surprising. This cyclical slow-down was amplified by various uncertainties, including global trade and Brexit. A fiscal stimulus would be justified not just because of the weak current growth, but because of major public infrastructure bottlenecks. And the German government has saved so much money on interest payments that it would be reasonable to use these savings for boosting public investment and incentivising private investment. 

RT: To what extent is there a crisis in the German export-led growth model?

ZD. While exports have a main role in Germany, it is not the most important driver of growth. The German car industry has to adjust to the electric car revolution, and other industries, like chemicals, need adjustments too. This will happen sooner or later and until then German production can be lower. Yet wage growth of about 3% and private consumption helps to keep the German economy away from recession.

RT. Despite heated debate on the importance of European-wide fiscal policy, disagreements remain too strong to expect concrete action in the near term. Will the ECB support measures be enough to kickstart a recovery? 

ZD. Unlikely. I expect weak growth in the euro area for some years to come.

RT. What should be the main economic policy priority for the new Commission? 

ZD. I recommend you read our report Braver, greener, fairer: Memos to the EU leadership 2019-2024. Our key points are the following: 

  • Focus more than in the past on growth and productivity dynamics in a way that fosters convergence within and between countries
  • Design a concerted economic strategy for climate policies 
  • Reform fiscal rules
  • Boost investment
  • Deepen the euro area

More on Germany’s economic shape: 

The German economy avoiding recession was "mainly attributable to industry," according to Timo Wollmershaeuser, Head of Forecasts at ifo Institute. "Although this sector is still in recession, the rate of decline in production has slowed down. A major contributing factor is that goods exports are on the upswing again after plummeting in the previous quarter. One reason for this may be that the mood in the manufacturing sector in the export markets has improved again since the middle of the year, especially in emerging economies."

State of Von der Leyen’s team

Lost about the final team of Commissioners? You may want to have a look at this infographic with who’s in and out and the changes on the porfolios names.  

What we are reading

"It's the unity, stupid"

As the time of Donald Tusk as president of the European Council is slowly coming to an end (Charles Michel will replace him on 1 December), it is worth reading his farewell speech at the opening ceremony of the academic year at the College of Europe. You will find references to Hanna Arendt, Margaret Thatcher and Hellen Thorning-Schmidt, among others, and an inspiring African proverb: "If you want to go quickly, go alone. If you want to go far, go together."

"Christine Lagarde must resist pressure on the ECB’s inflation target"

Christine Lagarde is undertaking a full review of the ECB’s overall strategy and central bankers are seeing this as a great opportunity to influence her tenure from the start. "The most promising course is one for which Ms Lagarde is uniquely qualified: to get eurozone governments to understand the interaction between fiscal and monetary policy", says Wolfgang Münchau. Read more here

United Kingdom might not exist in a decade

Brexit has put growing territorial pressure on the UK. Scotland and Northern Ireland voted remain and England and Wales voted to leave. An Ipsos Mori poll shows that 50% thought the United Kingdom would not exist in 10 years, up from 43% in 2014. Just 29% said it would exist in its current form in a decade, down from 45% in 2014. See more here

Digesting Macron’s provocative comments

After Macron’s controversial remarks in his interview with The Economist, where he claimed NATO is becoming "brain-dead", the European Council on Foreign Relations is analyzing France’s current EU views. German defence minister Annegret Kramp-Karrenbauer (AKK) and Macron may not have such differing views on European sovereignty as it appears at first glance, claims Ulrike Franke. See also Tara Varma’s article on what European sovereignty means for Macron. 

Have a nice week!

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