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Eurozone
Analyses and research findings on
- Economic outlook,
- Monetary and fiscal policy, debt bearing capacity,
- Banking sector and long-term financing, and
- Analyses of individual Eurozone countries.
The current KfW Business Cycle Compass Eurozone for download:
KfW Business Cycle Compass Eurozone June 2019 (PDF, 181 KB, non-accessible)
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In the first quarter of this year the euro area economy grew 0.4%, twice the rate of the preceding quarter. The joy over this is likely to be short-lived, however. Adverse international conditions are weighing on the industrial sectors and the renewed escalation of trade tensions is hampering the trend reversal.
We therefore expect the growth rate to level off again in the current quarter and maintain our GDP forecast unchanged at 1.1% for 2019 and 1.5% for 2020.
The downward risks to the business cycle are substantial and have risen again lately. The likelihood of a hard Brexit, new turmoil surrounding Italy’s public finances, rising protectionism and sanctions is growing. This is fuelling concerns that the weakness, which has so far been restricted to the manufacturing sector, will spill over into the labour market and the aggregate economy.
PDF for download:
KfW Business Cycle Compass Eurozone June 2019 (PDF, 181 KB, non-accessible)
In the course of 2018, economic performance in the monetary union slowed down significantly and the rapid deterioration in European business confidence at the start of the year is not good news. Even though one-off effects – such as the WLTP conversion – are subsiding, there are no signs of a vigorous recovery. Manufacturing, in particular, continues to suffer from the downturn in global activity and trade tensions.
KfW Research has therefore lowered its GDP forecast for 2019 to just 1.1%. The year 2020 should then see slightly more lively growth of 1.5%. However, our forecast is based on the assumption that none of the major downward risks materialises. In that case, a recession would probably be inevitable.
PDF for download:
KfW Business Cycle Compass Eurozone February 2019 (PDF, 189 KB, non-accessible)
An influenza wave, inclement weather, strikes and now the problems of the car industry with the new emissions standard: 2018 is the year of economic stumbling blocks. This is one reason why European economic growth also disappointed in the third quarter.
Foreign trade, in particular, is causing sustained headwinds. However, the domestic economy is fundamentally on solid footing. This leads us to remain optimistic despite the ongoing cooling of sentiment indicators. We continue to expect sound economic growth in the coming year.
We are therefore adjusting our forecast for real GDP growth in the euro area only slightly downwards. We now predict the economy to expand by 1.9 % in 2018 and by 1.6 % next year.
However, the list of downside risks has not been shortened. In particular, an escalation of the trade conflicts, a disorderly Brexit and an intensified reaction of the financial markets to Italy's budgetary policy could have a negative impact on Europe's growth course.
PDF for download:
KfW Business Cycle Compass Eurozone December 2018 (PDF, 184 KB, non-accessible)
Focus on Economics
In the current economic upswing, Germany's businesses are investing much less in their real capital stock than they are generating in financial resources. Their growing financial surplus is a key driver of the very high current account surplus for which Germany is facing broad international criticism. We are therefore taking a closer look at corporate decisions on savings and investment in order to identify starting points for correcting the current account imbalance.
Focus on Economics
Real estate prices in Germany have risen sharply since the beginning of the decade. But the boom is very different from the real estate bubbles that led to serious macroeconomic crises in the US, Spain and Ireland. Apart from the fact that German households have low debt levels, the moderate weight of the construction sector in particular indicates that even the bursting of a price bubble would not lead to severe macroeconomic problems. For example, construction investment accounts for only one tenth of Germany’s gross domestic product today, whereas a full one fifth of economic output depended on it in Ireland and Spain before the crises.
PDF for download:
Germany’s real estate boom: Is this time different? (PDF, 158 KB, non-accessible)
Focus on Economics
The debate over TARGET balances continues unabated. This is hardly surprising because the claims of the Deutsche Bundesbank on the TARGET2 system have grown to nearly EUR 1,000 billion. But exactly how serious are the risks for the German state and taxpayer?
Our paper explains how the balances emerge, to what extent monetary policy contributes to their increase and why TARGET balances do not constitute loans from the Bundesbank to other euro countries. Clearly, the construction of the monetary union still has many gaps that have to be closed. But TARGET2, a key element of the financial infrastructure in Europe, is not one of them.
PDF for download:
What TARGET balances are and how they emerge (PDF, 344 KB, non-accessible)
No sign of letting up: SMEs are on a path of growth in Germany and abroad
Germany’s SMEs continue to grow at a high rate. Employment in small and medium-sized enterprises has broken yet another record. Turnovers have grown at a rate not seen in years. International business also appears to have recovered from its slump. But profitability and productivity are unable to keep up. The investment upswing is consolidating but comes with greater concentration, as higher volumes are distributed across fewer investors. Micro-businesses in particular have stepped up investment and are using more long-term bank loans than ever. However, demand for credit to finance investment appears to have passed its zenith and companies are using more of their financial cushions. Should the financing climate become tougher, SMEs are in the best possible position thanks to record equity levels. Their outlook is therefore very positive. These and other findings are detailed in the new KfW SME Panel 2018.
Focus on Economics
It has been ten years since the financial crisis began but the consequences for European investment activity are still visible. As a result of the corrections made to previous excesses, high risk premiums and consolidation efforts, the investment rate is only slowly returning to its pre-crisis level. What is more, significant asymmetries have developed between the large euro countries.
Investment recovery is of enormous importance for the European economy. Without innovative technologies, modern machinery and infrastructure, Europe will not be able to harness its economic potential and will lose competitiveness. So it is positive that investment continues on a growth path. On the basis of an econometric model, KfW Research expects real gross fixed capital formation to grow by 2.8 % this year and 2.4 % next year.
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The long upswing in the euro area is not over yet but growth is now continuing at a more leisurely pace than in 2017. The business cycle has embarked on a more moderate growth path.
We have therefore lowered our growth forecast for 2018 to 2.0 %. We also see a further slowdown to 1.7 % for the next year. Both of these growth rates, however, are still above the long-term average.
But a range of downward risks could lead to a more significant cooling of the business cycle. Global trade conflicts, the balance of payments crisis in Turkey and the return of high risk premiums for European government bonds could become economic stumbling blocks.
PDF for download:
KfW Business Cycle Compass Eurozone September 2018 (PDF, 92 KB, non-accessible)
Economics in Brief
The ESM programme for Greece ends this month. It is a good opportunity to take stock. By setting up a financial bailout package, the members of the monetary union made a joint effort to safeguard the stability and integrity of the euro area. It did not require any transfer payments. While the recipient countries had to adopt strict austerity measures, the monetary union assumed the repayment risk for the European financial assistance. A look at how the exposure is spread across the individual countries also shows that, in relation to economic performance, Germany is far from being the country carrying the heaviest load.
PDF for download:
European financial assistance – Germany’s exposure is average (PDF, 42 KB, non-accessible)
Focus on Economics
France’s new government under President Macron has introduced a number of reforms in its first year in office. It has reformed the labour market at record pace, going farther than the previous government. Yet it has met with relatively little resistance so far and the reforms have faced a high level of acceptance among the population. This is important as the government’s efforts are designed to demonstrate credibility and reliability to their international partners through far-reaching and, in part, painful reforms in order to drive change at the European level as well.
PDF for download:
Reforms in France: focused and fast (PDF, 133 KB, non-accessible)
Focus on Economics
Since the beginning of 2017, the euro and US dollar yield spread can no longer explain the USD / EUR spot rate. The yield advantage of the US dollar is rising steadily and making the greenback increasingly more interesting for investors but the euro is appreciating in trend. In fact, other factors are currently dominating exchange rate developments – exchange rate expectations and risk premiums for unexpected euro depreciation. The exchange rate expectations which increased from early 2017 until April 2018, in turn, are driven by the expectation that the US dollar yield advantage will diminish in future. Consequently, the recent euro weakness should be overcome when investors’ nervousness regarding Italy fades and the ECB confirms the exit from its unconventional monetary policy.
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The euro area economy is shifting down a gear. One-off factors such as the influenza outbreak, strikes and unfavourable weather temporarily slowed economic growth in the first quarter. But the decline in sentiment indicators since the start of the year also shows that the cyclical peak has passed.
So although fundamentals remain sound, we expect an overall economic growth rate of just 2.2 % for 2018. Cyclical momentum should continue to gradually slip to 1.9 % next year.
Our forecast is subject to heightened downward risks, with the biggest headaches being caused by the deterioration in transatlantic trade relations and the new Italian government’s economic-policy agenda.
PDF for download:
KfW Business Cycle Compass Eurozone June 2018 (PDF, 74 KB, non-accessible)
Focus on Economics
New lending to enterprises has been increasing again in the euro area for just over a year, giving the economic recovery in the currency union a new quality. Nonetheless, significant differences are visible. While the credit market is booming in France and growing strongly in Germany, its momentum is clearly weaker in Italy and Spain. That is primarily because large enterprises there are increasingly funding their operations by issuing securities. But the credit channel is effective in those two countries as well.
PDF for download:
Credit markets in the euro area: heterogeneous but healthy (PDF, 203 KB, non-accessible)
2017 was the most successful year of the euro area economies in the past decade. The business cycle got off to a good start this year as well. Hard economic indicators signal that the euro area will continue expanding at an undiminished pace. Only the sentiment indicators have dropped slightly of late, if from a very high level.
We expect real growth of 2.4 % for 2018, a similar rate as last year. Growth may pass its peak in 2019 and may lose some momentum. For one thing, the upswing is now in its late stage. Growth is already above potential and the stimulus from the expansionary monetary policy measures is also waning. Nevertheless, we still forecast a growth rate of 2.1 % for next year.
PDF for download:
KfW Business Cycle Compass Eurozone March 2018 (PDF, 74 KB, non-accessible)
The EU is strongly integrated into global trade flows. The five largest EU economies – Germany, France, Italy, Spain and the UK – represent nearly one fifth of world trade. Small and medium-sized enterprises (SMEs) also contribute to EU exports and imports. Yet, their role in international trade is much smaller than their weight on the domestic market, as a joint study of KfW Research and Europe's national promotional banks Bpifrance, CDP, ICO and the British Business Bank shows. The obstacles are diverse. For many SMEs, financing their cross-border activities is a major challenge. Fostering the internationalisation of European SMEs requires effort – both at national and European level.
PDF for download:
Internationalisation of European SMEs – Taking Stock and Moving Ahead (PDF, 2 MB, non-accessible)
Focus on Economics
Italy has the highest debt-to-GDP ratio of all euro area countries aside from Greece. Thanks to historically low interest rates and above-average economic growth, in 2018 its debt ratio is set to decrease significantly for the first time in ten years. On the one hand, simulations of several scenarios demonstrate that there are currently no immediate doubts about the debt sustainability of the Italian state. On the other hand, no significant reduction in the debt ratio is currently to be expected and there are risks that could hamper the necessary debt cuts. For policymakers, the most important starting point lies in reforms that drive growth, tackle the structural problems of the Italian economy and help to overcome its chronic growth weakness.
PDF for download:
Economics in Brief
The conditions for reducing public debt in the euro area economies are very good. Interest rates remain extremely low and growth is stronger than ever in the past ten years. Debt reduction is so far proceeding moderately and at a similar pace as before the financial crisis. The level of debt, however, is significantly higher than at the time and putting higher pressure on governments. The good news is that the current recovery is set to remain robust for some time to come and therefore allows a further reduction in the debt-to-GDP ratio.
PDF for download:
Public debt reduction in the euro area – initial progress (PDF, 63 KB, non-accessible)
The euro area is the surprise of the year among the important economies. 2017 will be the monetary union’s best year in the last decade. KfW Research expects real gross domestic product to grow by 2.3 %.
The euro area economy will remain strong in 2018 as well. It is in good shape and sentiment indicators have climbed to remarkable heights. While robust domestic economic development will remain the main pillar of the recovery in the monetary union, the brightening global economic outlook is providing additional thrust. KfW Research has therefore raised its economic forecast and now expects 2.4 % growth next year (previous forecast: 2.0 %).
PDF for download:
KfW Business Cycle Compass Eurozone December 2017 (PDF, 92 KB, non-accessible)
Focus on Economics
The challenges for achieving the UN Sustainable Development Goals and the Paris climate targets are enormous and also apply to the finance sector. Credit institutions should examine whether they are appropriately positioned in light of the long-term risks of climate change, as well as the opportunities potentially arising from ambitious climate policy. Ultimately, however, climate-policy measures aimed at the banking sector cannot be a substitute for targeted climate policy in the sectors originally responsible for greenhouse gas emissions.
Economics in Brief
The economic recovery has now taken hold in all member states of the euro area. The output gap – a measure of an economy’s cyclical situation – is more similar across the 19 euro countries than hardly ever before in the nearly 20-year history of the currency union. This business cycle symmetry not only facilitates the single monetary policy. It also creates a favourable environment for the further institutional development of the euro area. When the member states’ economies are in a similar situation, their national ideas about the future reform pathway are less far apart. So the time to continue developing the euro area is now.
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The whole euro area is recovering – the whole euro area …? Yes! (PDF, 87 KB, non-accessible)
The upswing in the euro area is now entering its fifth consecutive year. Hard cyclical indicators have finally caught up with business confidence, which has been very high for some time now. Now it’s all systems go. The persistently high growth rates indicate that the current business cycle is slowly nearing its peak. For the first time since the end of 2008, the output gap is likely to close completely in this quarter.
KfW Research has therefore lifted its growth forecast for 2017 from 1.8 to 2.2 %. This would make 2017 the most successful year of the euro area economy in the last decade. Growth should continue at a similar rate (2.0 %) in 2018. The strength of the euro has the potential to slow down the pace of expansion. Further appreciation might be a dampener on economic growth. Given the robust global business cycle, however, the upswing may even accelerate.
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KfW Business Cycle Compass Eurozone September 2017 (PDF, 119 KB, non-accessible)
Focus on Economics
Thanks to the ECB's expansionary monetary policy, the euro states have realised considerable funding advantages since Draghi’s ‘whatever it takes’ speech exactly five years ago. Italy alone has since then avoided additional funding costs in excess of EUR 100 billion. An interest rate turnaround is now on the cards, and Italy in particular has to do more to prepare for the return of steadily rising interest rates.
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Economics in Brief
Five years ago, on 26 July 2012, the President of the European Central Bank, Mario Draghi, delivered a speech at a conference in London that brought the crucial turnaround in the euro crisis. We take a look back and pay tribute to his words.
PDF for download:
Five years of ‘whatever it takes’: three words that saved the euro (PDF, 58 KB, non-accessible)
Economics in Brief
In 2010, the euro area was hit by the debt crisis in what was a textbook example of an asymmetric shock. While economic output declined massively in the countries affected, it only stagnated in other member countries. Within a monetary union, such asymmetric shocks are difficult to handle. There is no monetary policy that is geared to the requirements of individual member states nor is there any national exchange rate mechanism that would help bring about the required economic adjustment. Given the high indebtedness of the countries affected, fiscal policy measures to stimulate the economy were not an option either during the debt crisis. In order to make the adjustment process less painful and quicker, the euro area needs to find an alternative mechanism to absorb the effects of asymmetric shocks. This mechanism should take effect quickly and automatically, i. e. without any political case-by-case decision making. Otherwise there is a risk that spending that is intended to be anti-cyclical and stabilising will turn out to have a pro-cyclical effect.
PDF for download:
Asymmetric shocks within the euro area – absorption mechanism needed (PDF, 65 KB, non-accessible)
Economics in Brief
Spain has been growing very strongly for more than three years – roughly twice as fast as Germany, which is perceived mostly as the growth engine of the euro area. Our KfW Research Business Cycle Clock shows, however, that much of Spain’s growth is primarily an urgently needed recovery following a very serious dual crisis – the financial crisis from 2008 and the debt crisis from 2010.
The economic achievements of the past three years have now almost closed the output gap, and many of the consequences of the crisis have been overcome. But there is still work to be done to consolidate the budget. Spain’s debt levels have tripled in ten years, and it is foreseeable that the ECB will gradually normalise monetary policy. The task of reducing debt will grow in importance against this background.
PDF for download:
In its fourth year, Spain’s recovery has overcome many crisis effects (PDF, 43 KB, non-accessible)
Economics in Brief
The ECB’s exit from its unconventional monetary policy is dragging on. It resembles a game of patience – perhaps best compared to a Chinese tangram puzzle, in which seven puzzle pieces have to be assembled to meaningful form. Legend has it that in ancient China a student monk dropped a valuable tile and struggled long to put the broken parts back together. Unlike this accident, the ECB’s policy always was and still is a deliberate act. The central bankers therefore know exactly what needs to be done to return the monetary situation back to normal. We present a possible exit approach for the ECB – in seven parts.
PDF for download:
“Taper tangram” – the ECB’s exit is a game of patience (PDF, 43 KB, non-accessible)
The European economy is making good progress. In the first quarter the euro area grew again at a healthy pace and faster than the USA and the United Kingdom. Exceptionally high business confidence suggests that this positive trend will continue. We therefore raise our economic forecast by 0.2 percentage points to 1.8 % for this year and now expect slightly higher momentum of 1.7 % instead of 1.6 % next year as well.
The prospects for investment to become the second pillar of growth alongside private consumption are good. Business optimism has combined not just with favourable borrowing conditions but also with above-average capacity utilisation. Moreover, political risks have decreased significantly since the elections in France and the Netherlands.
PDF for download:
KfW Business Cycle Compass Eurozone June 2017 (PDF, 92 KB, non-accessible)
Economics in Brief
If the British opt for a "hard Brexit", trade between the UK and Germany will in future be subject to the WTO rules that apply to all other members of the World Trade Organisation as well. That could mean a 10 % tariff on German cars that are being traded freely today, for example. For many of Germany's classic export industries, however, lower tariffs would tend to apply, such as 0 to 4 % on machinery and equipment products. Germany's industries would be capable of handling a hard Brexit – even if some companies with a focus on business in the UK would definitely suffer, and even if the country is Germany's third biggest export market. But a hard Brexit would hit the UK economy much harder: among other things, the country is dependent on imports because of its low industrial capacity.
PDF for download:
At what level might tariffs be set after a “hard Brexit”? (PDF, 62 KB, non-accessible)
Focus on Economics
Sixty years ago, the six founding states laid the foundation for the European Union with the signing of the Treaties of Rome. This anniversary is a welcome occasion for KfW Research to recall that, despite all its current difficulties, the EU is a success story. A look back on Europe's history and a comparison with other regions of the world show that our peace, freedom and unprecedented prosperity are anything but a matter of course. Only by opening up to each other in a spirit of friendship and by cooperating peacefully did the peoples of Europe succeed in achieving all this. Common sense therefore tells us that we are well advised to continue our cooperation within the EU into the future. As always, this requires compromises and concessions.
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The euro area achieved solid growth in 2016. This is due, among other factors, to the prudent reaction to various political events, especially the Brexit. Nevertheless, political risks are hampering growth in the euro area. There has not been a sharp drop in business investment, for example, but business activity cannot really take off in this environment.
Nevertheless, for 2017 it’s all systems go. Business confidence is on a six-year high. We expect growth to remain on a good level for 2017 and 2018 despite the political turmoil. The output gap should gradually close.
PDF for download:
KfW Business Cycle Compass Eurozone March 2017 (PDF, 60 KB, non-accessible)
Focus on Economics
Inflation in Germany has increased noticeably. Nevertheless, we do not expect the European Central Bank to respond to this change. After all, the rise in annual inflation is mostly temporary. Besides, inflation in the remaining euro area is much lower than in Germany. And the ECB targets its monetary policy – which also brings many advantages for Germany – only at the euro area as a whole.
PDF for download:
ECB policy remains unchanged – despite temporarily higher inflation (PDF, 68 KB, non-accessible)
Focus on Economics
In January, Germany's inflation rate climbed to almost 2 % for the first time since mid-2013. The rise was mostly due to the development of the crude oil price. And as the upward trend of the oil price is not expected to continue, the inflation rate will soon drop again. Nevertheless, it can be stated that, all in all, German inflation is in a process of normalisation. At the same time, the ECB will not respond to this because it does not manage inflation of a single country but of the euro area as a whole. There, prices are still rising much more slowly than in Germany.
PDF for download:
Inflation in Germany rises only briefly above two per cent (PDF, 75 KB, non-accessible)
Focus on Economics
Member states of a currency union relinquish their national monetary policies. Economies in the euro area therefore cannot respond to asymmetric shocks with monetary policy measures but only with limited fiscal policy actions. Labour migration might reduce the adjustment pressure on affected countries and prevent the emergence of unemployment. But there are high informal barriers to intra-European migration. Labour mobility in Europe has grown but remains restricted, so national labour markets must absorb a large portion of the adjustment pressure after economic shocks.
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Focus on Economics
Flexible and well-functioning labour markets are of high importance particularly for economies in a monetary union. Exchange rates cannot act as a correction mechanism in the event of asymmetric shocks, and labour markets have to absorb much of the adjustment pressure in times of crisis.
In an OECD comparison, the labour markets of the large euro area economies are generally highly regulated. This is particularly true of Italy, Spain and France. However, these countries addressed important weaknesses through reforms they introduced between 2012 and 2016. The situation on their labour markets is gradually easing, but some reform elements need more time to become fully effective.
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Focus on Economics
Germany is particularly dependent on foreign labour potential because of its unfavourable demographics. Today, one in ten employees subject to social security contributions have a foreign passport. The German economy thus benefits heavily from the EU’s free movement of workers, but labour migration from outside the ageing EU states is becoming increasingly important. Refugees can also contribute to offsetting looming labour market constraints if they integrate successfully. In the past five years, SMEs have hired some 250,000 refugees – although rarely as skilled workers and primarily as temporary employees, interns and apprentices.
PDF for download:
Foreign workers in German SMEs: a strong plea for free labour markets (PDF, 90 KB, non-accessible)
Economics in Brief
At the end of November 2016, the European Commission presented a new set of proposals for amending banking regulation in Europe. Here we briefly explore some of these proposals: the quantification of the leverage ratio and the net stable funding ratio, the expanded support for SME loans and infrastructure projects, and the reduction of bureaucratic burdens for small banks.
PDF for download:
Banking regulation in Europe: further steps on a long road (PDF, 42 KB, non-accessible)
Focus on Economics
The development of new lending to non-financial enterprises in the euro area shows that the credit channel is generally working. This is crucial to the effectiveness of the European Central Bank's monetary policy. However, new lending was subdued in the past quarters, especially in Spain and Italy. While special factors are at work in Spain – including large enterprises substituting loans with corporate bond issues – firms in Italy continue to face relatively high credit constraints. This is probably also due to the difficulties of Italian banks, which hold a relatively large amount of non-performing loans in their books. Resolving this problem appears to provide a major opportunity to revitalise the euro area's credit markets.
PDF for download:
Euro area credit markets: step by step, little by little (PDF, 75 KB, non-accessible)
Economics in Brief
Germany's SMEs in particular have much to gain from the free movement of workers in the EU as almost 6 % of their employees are non-German EU citizens. The current success of anti-immigration parties in Europe is therefore unsettling SMEs that conduct international business. In the latest special survey conducted by the KfW SME Panel, these firms stressed the great importance of labour mobility within the EU. Under the impression of the looming Brexit, it is particularly the SMEs with business operations in the United Kingdom that call for open labour markets in Europe.
PDF for download:
Germany's SMEs after US election and before Brexit: keep markets open! (PDF, 42 KB, non-accessible)
France, Germany, Italy, Spain and the United Kingdom
Venture Capital is important for financing innovative start-ups. In a joint study the National Promotion Institutions of France, Germany, Italy, Spain and the United Kingdom identify four main areas where further actions are paramount for boosting EU venture capital to the next level: Increasing the supply of funds for VC investments, reducing the fragmentation within the European VC markets, increasing quantity and quality of demand for VC and finally improving exit routes for VC investments. To build momentum in VC across Europe, activities in these fields on both the EU as well as the national level are needed.
PDF for download:
Building Momentum in Venture Capital across Europe (PDF, 951 KB, non-accessible)
In the third quarter, the euro area continued to grow with remarkable consistency – despite disturbances from financial markets and politics. The good mood among enterprises gives reason to hope for a higher pace of growth in the final quarter. KfW Research has therefore lifted its forecast for real economic growth to 1.6 % for the year 2016 as a whole.
We expect output to expand at a similar rate next year as well (+1.5 %). The good progress on the labour market, illustrated by an employment rate that is close to the previous high of 2008, is expected to further bolster consumption. This consistency contrasts with the exceptional uncertainty political developments have generated for businesses. In this environment, reliable planning is a challenge for enterprises, which are postponing investment decisions.
PDF for download:
KfW Business Cycle Compass Eurozone December 2016 (PDF, 56 KB, non-accessible)
Focus on Economics
Greece and Portugal were bailed out by rescue packages from European partners and the IMF. In return, both countries had to implement macroeconomic adjustment programmes. The outcomes were quite different despite similar problems and comparable programme design. While the Greek economy developed much less favourably than the programme had assumed, Portugal remained largely on course, partly because the austerity requirements were looser and its export sector grew faster. Nevertheless, Portugal's current economic problems illustrate that the patient is not yet out of the woods.
PDF for download:
No pain, no gain? Economic adjustment programmes in Greece and Portugal (PDF, 83 KB, non-accessible)
Focus on Economics
The price of crude oil collapsed from mid-2014 until early this year. That trend coincided with financial market participants' clearly declining inflation expectations, prompting the European Central Bank to make monetary policy even more expansionary.
As the oil price has been exhibiting an upward trend again since February, the question is whether market-based medium-term inflation expectations will trend upward again as well. Evidence so far indicates that this will not happen. So the current oil price trend itself does not provide the ECB with a motive for adjusting monetary policy in the near future.
PDF for download:
Crude oil price no longer drives inflation expectations (PDF, 129 KB, non-accessible)
In economic terms, the first half-year of 2016 was one of the stronger ones since the financial crisis – despite the already expected downturn in the second quarter. However, the Brexit vote has generated headwinds. It is true that financial markets have reacted calmly and though business sentiment is subdued, it is not pessimistic. Nevertheless, uncertainty is holding back investment and preventing the start of a self-sustaining upswing.
Given the solid quarterly figures, KfW Research has still revised its growth forecast upwards: Real growth in the euro area is predicted to be 1.5 % in 2016 and only marginally lower in 2017. Growth divergences are widening. Italy is suffering from an ailing banking sector and high political uncertainty. It remains the euro area's problem child.
PDF for download:
KfW Business Cycle Compass Eurozone September 2016 (PDF, 174 KB, non-accessible)
Economics in Brief
GDP growth rates usually require an interpretation. Is a 1.6 % increase a lot or little? The new KfW Research Business Cycle Clock helps to understand the meaning of such growth figures. It traces the course of the business cycle in the euro area and makes a simple division into upturn, boom, downturn and recession. To enable this it compares the difference between actual growth and potential growth with the output gap in the euro area.
The euro area is currently in a phase of cautious upturn. However, increases in economic output are moderate and the road back to strong pre-financial crisis growth levels is a long one.
PDF for download:
KfW Research Business Cycle Clock Euro Area (PDF, 61 KB, non-accessible)
Focus on Economics
A countercyclical fiscal policy stabilises the economy in times of crisis. However, due to national constraints – caused by excessive debt levels for example – euro area countries consolidated their public finances overall during the debt crisis. As a result, fiscal policy was pro-cyclical and made the crisis worse. Times have changed since then, though, and a more expansionary policy seems possible.
Fiscal policy measures generate effects that travel across national borders via different channels, therefore greater coordination between euro area countries is desirable. This would increase the punch of European fiscal policy.
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Focus on Economics
In the last 20 years, productivity growth has been very modest in Spain and especially in Italy. Structural problems afflicting the Italian economy make it difficult to increase productivity. Regulatory burdens encumber the growth of small, private-sector companies. Reforms aimed at improving public administration efficiency could accelerate the growth of small firms. Larger enterprises often invest more in research, attract more foreign direct investment and thus benefit from spillover effects and other economies of scale. Appropriate reforms would trigger a process culminating in greater productivity and growth. This would simultaneously increase convergence in the euro area and facilitate political coordination on issues such as joint monetary policy.
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KfW Research has lowered its German economic growth forecast for 2016 to 1.5 % (previously 1.7 %) and for 2017 to 1.2 % (previously 1.8 %). Uncertainty and weaker export momentum dampen business investment. Employment, consumption and residential construction, on the other hand, continue to grow appreciably. The eurozone is expected to grow by only 1.3 % in 2016 and 1.1 % in 2017 (previous forecasts: 1.6 % and 1.8 %). The largest negative impact is on the UK itself: the economy will slow considerably in the second half of the year. The longer the timetable and goals of Brexit remain unclear, the worse it is for the UK economy.
PDF for download:
KfW Business Cycle Compass July 2016 – Brexit Update (PDF, 127 KB, non-accessible)
KfW Research maintains its forecast of 1.6 % euro area growth for 2016. The euro area started the year 2016 surprisingly well on the back of strong domestic economic performance. Private consumption expenditure developed well in the second consecutive quarter, as did gross fixed capital formation. This is encouraging because the investment restraint that has persisted since the financial market crisis must come to an end in order to create a stable foundation for the euro area recovery. Despite the strong first quarter, KfW Research still expects growth of 1.6 % for this year and 1.8 % for 2017. The sentiment indicators do not point towards a sustained acceleration of growth momentum in the single currency region. Moreover, the lead-up to the Brexit referendum has created a climate of heightened uncertainty and caution among consumers and businesses.
PDF for download:
KfW Business Cycle Compass Eurozone June 2016 (PDF, 102 KB, non-accessible)
Focus on Economics
Since Draghi’s ‘whatever-it-takes’ speech in the summer of 2012, the yields on government bonds of the four biggest euro area economies have dropped significantly. The ECB’s OMT programme has brought about a normalisation on the sovereign bond market where excesses occurred at the height of the debt crisis. KfW Research estimates that the ECB thus protected southern European states in particular from billions of euros in increased funding costs. If the yields on Spanish and Italian government bonds, for example, had remained on their high level of 2012, their governments would have been forced to adopt additional budget corrections that would have compromised the economic recovery. With its expansionary monetary policy the ECB bought the states time, but this time is limited and should be used wisely to implement structural reforms.
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We expect the economic recovery of last year to continue in 2016. In view of the bumpy start to the year on the financial markets and the current economic downturn in some emerging economies, we have adjusted our previous forecast for 2016 downward slightly from +1.8 to +1.6 %. For 2017 we expect price-adjusted GDP in the euro area to grow by 1.8 %.
Private consumption will remain an important growth driver in the euro area. Investment activity will continue to be slowed down by major uncertainties. In addition to worries over the development of the global economy and unresolved political issues in Europe, we consider the latest developments on the financial markets to be the main risk to our forecast.
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KfW Business Cycle Compass Eurozone March 2016 (PDF, 72 KB, non-accessible)
Economics in Brief
At the 18 and 19 February meeting of the European Council in Brussels, a package of EU reforms will be negotiated which Prime Minister Cameron will use to make the decision to stay in the Union more appealing to Britons in the approaching referendum. His demand for reductions of in-work benefits for non-EU citizens is a cause of conflict. The European Council has drawn up proposals that will serve as a basis for negotiations at the EU Summit and it is showing the will to compromise. The current draft allows for benefit payments to non-EU citizens to be cut in certain exceptional situations. That would discriminate workers on the basis of their countries of origin and temporarily restrict the freedom of movement of workers in the European Union – one of the four fundamental pillars of the single market.
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Economics in Brief
Spain’s economy is on a very good course and exhibits clear progress in managing the legacy of the crisis. Nevertheless, much remains to be done as shown by, most notably, the example of the continuing very high unemployment rate. However, political imponderables are creating uncertainty. Parliamentary elections will be held on 20 December. The new Spanish government will have to quickly find a pragmatic response to the Catalan independence movement.
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Spain: political uncertainty overshadows good economic outlook (PDF, 120 KB, non-accessible)
KfW Research sees growth in the euro area picking up slightly to 1.8 % in the year ahead (forecast for 2015: 1.5 %). Monetary and fiscal policy are providing positive impetus which, through improvements on the labour markets and in the banking system, can lead to a self-sustaining recovery. However, much remains to be done to overcome the economic weakness. Further progress in reducing unemployment is urgently needed in order to improve political stability in the member states.
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KfW Business Cycle Compass Eurozone December 2015 (PDF, 102 KB, non-accessible)
Economics in Brief
Time and again, doubts are raised as to whether monetary policy transmission in the euro area can work at all in the current environment of increasing banking regulation. The expansive stance of the European Central Bank (ECB) is regularly criticised against this background. However, our conclusion is that the credit channel as the ‘classic’ mechanism of monetary transmission into the real economy is currently quite intact. The ECB’s medicine is thus already working. It is therefore also understandable that in its December decision the ECB adopted rather moderate additional measures to reach its inflation target of close to but just below 2 % in the future.
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Euro area: the credit channel is working! (PDF, 77 KB, non-accessible)
Focus on Economics
European natural gas prices have risen relative to US prices, especially as a result of increased shale gas supply in the USA. Energy-intensive industries in Europe are faced with the major challenge of compensating this effect by increasing their energy efficiency. But the improved integration of the European natural gas market, the broader supply of imports and, most of all, the strong decline in demand for natural gas in the context of the Energy Union are counteracting further price rises in Europe.
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Fuelling the future with natural gas (PDF, 818 KB, non-accessible)
Economics in Brief
The negotiations between Greece and the European partners have entered (another) critical stage. The recapitalisation of the Greek banks is high on the agenda and there is tremendous pressure to finalise it before the end of the year. Last weekend, the ECB published the results of the review of the financial institutions, which show that the four largest banks need up to EUR 14.4 billion of fresh capital. Stabilising the banking sector is important not only for the recovery of the Greek economy but also for the conclusions that can be drawn regarding the further institutional development of the euro area.
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Economics in Brief
Too little has been invested in Europe since the financial and economic crisis. This applies to both the public and private sector. A substantial investment backlog has developed as a result. Capital stock is threatened with obsolescence. Competitiveness and potential growth are declining. We identify three approaches to countering this trend.
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Efficient investment for higher growth in the euro area (PDF, 87 KB, non-accessible)
Economics in Brief
In September 2015, consumer prices in the euro area fell below zero again. The main driver is the sharp fall in oil prices. Inflation will rise if oil prices recover but no significant jump is expected. Therefore, the ECB will stick to its expansive monetary policy.
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Inflation quiet thanks to oil? (PDF, 136 KB, non-accessible)
SME Investment and Innovation – France, Germany, Italy and Spain
There are more than 13 million SMEs in France, Germany, Italy and Spain. They represent more than 98 % of all enterprises, account for more than half the workforce and generate a substantial part of value added in these countries. In a joint study with the promotional banks BPI, CDP and ICO, KfW analyses the structure and the development of SMEs in the four economies. Their investment and innovation activities are crucial for the future competitiveness of Europe but have suffered from persistent weakness since the financial and economic crisis. Also in Germany, SME investment and innovation are still well below pre-crisis levels. To address this issue and ensure long-term economic growth, we need specific measures directed at SMEs at both a European and national level.
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SME Investment and Innovation – France, Germany, Italy and Spain (PDF, 3 MB, non-accessible)
KfW/ZEW CO2 Barometer
In 2014, EUA price expectations were corrected upwards and depict a positive trend in the medium and long term. Nevertheless, CO2 abatement remains in most cases only a side effect of energy efficiency measures and the EU ETS generated only weak incentives for firms to implement carbon abatement measures. A binding international climate agreement is considered to be less harmful for companies’ competitiveness than Europe-wide or national climate actions.
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KfW/ZEW CO2 Barometer 2015 – Carbon Edition (PDF, 2 MB, non-accessible)
The positive growth trend in the eurozone continued into the second quarter of 2015, as a result of the weak euro and falling unemployment. Exports in particular are developing positively. The new aid programme for Greece reduces insecurity. KfW Research has raised its growth forecast for real GDP from 1.3 to 1.5 % for the year 2015.
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KfW Business Cycle Compass Eurozone September 2015 (PDF, 32 KB, non-accessible)
Economics in Brief
With its planned Energy Union package, the European Commission is pursuing extensive reforms to the European energy system. The specific aims of the Energy Union are to increase security of supply, further integrate the domestic EU energy market, increase energy efficiency, reduce energy consumption, lower CO2 emissions and support research and development (R&D). To do this requires cross-border cooperation between countries and coordinated energy markets, which will lead to cost efficiency. Because of the diversity of the member states’ energy policy interests, there is still a long way to go.
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More Europe! On the road to Energy Union (PDF, 55 KB, non-accessible)
Growth in the Eurozone accelerated slightly at the start of the year. Supported by encouraging economic conditions, such as low oil prices and a weak euro, all five major economies contributed to growth for the first time since 2010.
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KfW Business Cycle Compass Eurozone June 2015 (PDF, 96 KB, non-accessible)
The eurozone economy is slowly picking up momentum. KfW therefore expects growth of 1.3 % for the year 2015. Private consumption, which is benefiting from improved conditions on the European job market, will play an important role.
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KfW Business Cycle Compass Eurozone March 2015 (PDF, 35 KB, non-accessible)
Focus on Economics
The recent low inflation rates in the euro area are often explained by the significant oil price drop. But this is only part of the story. Other measures of inflation that are less influenced by energy price trends also indicate very low inflation rates. The reasons for the present inflation environment are rather to be found in overall economic demand and the job market situation.
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Economics in Brief
The significant devaluation of the euro over the course of the last year has raised hopes of an improvement in exports and of growth in eurozone economies. However, in view of the fact that individual member states trade with different countries, there will be significant differences in the extent to which individual countries benefit. Economics in Brief reveals which of them can expect to profit most.
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Who benefits from the devaluation of the euro? (PDF, 193 KB, non-accessible)
Economics in Brief
The currency union retains its appeal, as demonstrated by Lithuania's accession to the eurozone on 1st January 2015. This not only shows that the eurozone is an attractive club to belong to even after the crisis, but also that the institutions created during the crisis have become fully accepted. Lithuania will benefit from its euro membership, but the country is also a gain for the currency union.
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Eurozone grows as Lithuania joins (PDF, 115 KB, non-accessible)
KfW is sticking by its forecast of 1.0 % for 2015. This expansion should be driven primarily by private consumption and exports.
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KfW Business Cycle Compass Eurozone December 2014 (PDF, 98 KB, non-accessible)
Economics in Brief
Ireland’s sustainable return to the capital markets can be considered successful nearly one year after the end of the aid programme. The economy is growing again and the problems in the banking sector are slowly being solved. The country can definitely take credit for its success.
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Economics in Brief
The ECB stress test fulfils several purposes, but the focus is on the equity position of banks. From the point of view of economic growth this focus makes sense. Meanwhile, the question of the optimal level of equity is contentious.
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The new ECB test and banks' equity (PDF, 115 KB, non-accessible)
Focus on Economics
Warnings grow about possible overheating on European residential property markets. Yet the situation is anything but homogenous. In some countries corrections on real estate markets are still underway, while in others, alarming price developments can be observed again and corrective measures must be taken.
European housing markets: are overheating concerns justified? (PDF, 143 KB, non-accessible)
There is very little sign of life from the eurozone. In the first edition of the new KfW Economic Compass Eurozone, we are forecasting growth of 0.7 % for the eurozone in 2014. Stagnation in the second quarter will be followed by tough second half of the. The lack of investment remains the weakest point. The KfW Economic Compass Eurozone will be published quarterly in the future, roughly one week after its 'big brother', the KfW Economic Compass Germany.
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KfW Business Cycle Compass Eurozone October 2014 (PDF, 110 KB, non-accessible)
International comparison of SMEs’ competitiveness – Germany still among the leaders
German SMEs currently seem very well equipped for international competition – but this position is under threat in the long term. This is the conclusion of the new KfW Competition Indicator, which depicts the international competitiveness of small and medium-sized companies. SMEs in the USA, in the UK, and in emerging markets are much better placed for the future. Italian and Spanish small and medium-sized enterprises bring up the rear in the overall ranking, which also takes location factors into account.
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KfW Competitiveness Indicator 2014 (PDF, 222 KB, non-accessible)
Focus on Economics
Since the onset of the financial crisis, France has been experiencing weak growth and a high level of unemployment. France is considered "the sick man of Europe" in public debate and gets deluged with proposals. But what is the real reason for the current weakness in growth? What does it mean for the eurozone? What would be an appropriate economic policy strategy for the French government? What kind of support should the European partner countries provide?
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Focus on Economics
The German debate about Southern European economies suffers from premature conclusions on the basis of analogies to the German ex-perience of the 2000s. However, the causes of Italy’s weak growth differ from both Germany’s troubles and other peripheral economies’ problems. The main break on faster economic growth in Italy is in deficiencies of the public sector. Moreover, important factors in the crisis are systemic effects stemming from membership in the Eurozone. In particular, Italy suffers from a credit crunch caused and magnified by adverse feedback loops in a currency union.
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Italy is different: Beyond labour market reforms (PDF, 185 KB, non-accessible)
Focus on Economics
International financial aid for Portugal ended in mid-May. In future, the country will be solely reliant on the capital market to finance its national budget – without the protection provided by a credit line from the European Stability Mechanism (ESM). This is a success of great symbolic power in a political sense for Portugal. However, the decision is also justifiable in economic terms.
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Economics in Brief
The French government has presented its plans for budget consolidation. The basic concept behind these plans is sound: limit growth in expenditure without damaging the economy. However, the success of these plans is in doubt as growth assumptions are too optimistic and resistance is looming from many directions.
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France's plans deserve to be implemented (PDF, 133 KB, non-accessible)
Economics in Brief
The second pillar of the banking union comprising the single resolution mechanism and the single resolution fund is now in place. This Economics in Brief article briefly outlines the processes in the event of a banking crisis. Furthermore, it explains why the second pillar largely meets its objective as long as our expectations are not unrealistic.
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SRM and SRF: a success – by European standards (PDF, 541 KB, non-accessible)
Economics in Brief
Seen as a whole, lending in Italy, Spain and Portugal declined to the same degree. However, a closer look at the figures reveals some differences. Sole proprietors have more to contend with than larger companies; and the outlook for Spain and Portugal is better than it is for Italy.
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SME loans in southern Europe – are the lean times over? (PDF, 235 KB, non-accessible)
Focus on Economics
Debt and deficits are usually seen as negative – the result of poor financial management. Yet they are market economy instruments and essential to the existence of their counterparts: assets and savings. These instruments allow money to flow from sectors with savings to sectors wishing to invest. So, it is difficult to praise surpluses and assets while at the same time condemning deficits and debt. This Focus on Economics looks at the key relationships.
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Should we feel bad about debt? (PDF, 182 KB, non-accessible)
Focus on Economics
The traditionally high levels of youth unemployment in Greece, Italy, Portugal and Spain soared even further with the outbreak of the financial crisis. Rigid labour markets and deficiencies in the education systems are major structural causes of this problem. In the medium to long term, labour market reforms and changes to the education system, in addition to an improvement in the overall economy, are urgently needed to overcome the problem. But in the short term, active labour market policies and increased mobility for training and employment purposes can provide relief.
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Economics in Brief
Latvia's adoption of the euro sends a strong signal about the the currency’s appeal.
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Focus on Economics
Austerity policies have reduced the deficit but national debt has not stabilised. Austerity is a problem in its own right. Will more austerity actually stabilise the situation? Well yes, but more patience will also be needed.
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Fiscal consolidation in Spain: the battle goes on (PDF, 234 KB, non-accessible)
Focus on Economics
Ireland will succeed in returning to the capital markets when the EU financial support package ends in December, even if there is still uncertainty concerning the Irish banking sector.
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Focus on Economics
The ECB and Fed conduct their respective monetary policies differently. An exit from expansionary monetary policy would therefore result in different exit scenarios and interest rate effects.
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World of difference between Fed and ECB monetary policy (PDF, 200 KB, non-accessible)
Focus on Economics
Firm size, a more balanced sectoral distribution, a strong industrial basis, orientation towards innovation – these are crucial ingredients for competitiveness.The ECB and Fed conduct their respective monetary policies differently. An exit from expansionary monetary policy would therefore result in different exit scenarios and interest rate effects.
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Focus on Economics
Public discussion on the competitiveness of European countries tends to focus on the problems of Southern Europe. There is a need for structural reforms to improve competitiveness not only in Italy, but in France and Germany too.
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Focus on Economics
German SMEs are facing a – compared to the Euro area – comfortable financing situation. The declining demand for bank loans is accompanied by a good access to loans. In contrast, the credit crunch in Southern Europe is continuing; the gap in Europe widens further.
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Loans for SMEs - gap in Europe widens further (PDF, 169 KB, accessible)
Focus on Economics
The main goal, however, that of improving the banks' liquidity, has been achieved.
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"Big Bertha" and its effectiveness (PDF, 106 KB, non-accessible)
Economics in Brief
While a correction of house prices is already underway, a reduction in mortgage debt levels is not yet in the cards. The downward trend in the Dutch housing market will continue.
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House price correction is underway in the Netherlands (PDF, 172 KB, accessible)
Economics in Brief
ECB monetary policy: Currently no risk of inflation. The ECB has plenty of instruments.
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ECB monetary policy: Currently no risk of inflation (PDF, 219 KB, accessible)
Focus on Economics
Recessions in the reforming countries are hampering fiscal consolidation. Capital outflows from these countries are a major cause for the contraction of the economies.
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Ways out of the euro crisis: Growth needs financing (PDF, 224 KB, non-accessible)
