Germany’s pivotal position in Eurozone markets: The view from the Federal Ministry of Finance
By Steffen Kampeter, Parliamentary State Secretary. As the largest economy in the European Union, Germany has been a key contributor to the common effort to reverse the crisis of confidence in Europe. A vibrant capital market for German and European investment products is a central institutional ingredient to the successful fulfillment of this task, and I will outline below what makes this market attractive to international investors and how we intend to further foster this appeal.
The competitiveness of the German economy has been the main factor in helping us overcome the successive crises of the past five years, protect employment and grow. Indeed, real GDP growth, at 4.2% in 2010 and 3.0% in 2011, more than made up for the effects of the global financial crisis of 2008. Growth was positive again last year to the exception of the fourth quarter, and this trend will extend into 2013, when we expect growth to be driven mainly by internal consumption and investment. The ongoing rise in employment — itself the combined fruit of continuing reforms of the labour market, the export performance of German companies and our decision to overhaul the German energy market — will benefit the economy as well.
The recent economic success of German companies, especially those among the small and mid-sized businesses that make up our renowned Mittelstand, has few equals in the global economy. German companies are well positioned on the world’s fast-growing markets. They are reaping the benefits of a flexible wage-setting, of stable financing conditions and a sophisticated public infrastructure. German equities recovered very quickly from their two recent major setbacks — the first following the Lehman Brothers insolvency, and the second in the latter half of 2011 due to concerns surrounding the Euro crisis. Since then, German enterprises have provided healthy returns for investors and stakeholders in general, and continue on their upward path.
Among the main drivers of this success is research and development. This government acknowledges the importance of R&D for the wider economy. At around 2.9% of GDP, German expenditure in this area ranks at the top of the European Union league table. Public as well as private investment in research and development will continue to ensure that German business retains its innovative edge. Consequently the government has significantly expanded the funding of R&D in the last four years.
In the public domain, Germany’s debt instruments are among the safest, and most liquid worldwide. The yield on our 10 year Bund security ranges well below 2%, and our 30 year bond pays a rate of well below 3%. For a large sovereign borrower, these are very close to the respective risk-free rates. Our markets for public bonds and private investment instruments continue to enable international investors to build exposure to the Eurozone at minimal risk. This is a benefit to the Eurozone as a whole. It underpins the role of the Euro as a stable reserve currency and supports Euro capital markets by supplying a stable anchor.
A commitment to fiscal discipline
The health and competitiveness of the German economy and the country’s low financing costs are not only closely interlinked, but they also bear important lessons for the whole of Europe. Our continent needs more, not less, private entrepreneurship, and it needs less, not more, public expenditure. Healthy public finances are a condition of sustainable economic growth. Market confidence in this approach to fiscal and economic policy encourages us in our position that sound fiscal policy and economic growth are not contradictory but rather reinforce each other in the medium term. We are fully aware that all members of the European Union, including ourselves, need to be more successful on this front in the future than we were in the past.
In this context, I would also point to another case where serious economic reform coupled with budgetary prudence is bearing fruit: Ireland. Market sentiment towards the sovereign Irish signature has turned around and improved considerably, and it is our view that the Irish example shows the way. We need to pursue that avenue together with our partners that are also currently benefitting from EFSF programmes.
A level playing field for regulation
In terms of lessons learned from the recent crises, we need to recognize the overwhelming importance of the quality of financial market regulation for the functioning of capital markets. In this area, work remains to be done. Progress needs to be co-ordinated at the level of the European Union as a whole, if not on an even wider scale, in order to be successful in preventing future market breakdowns.
In the early hours of 13 December 2012, the finance ministers of the European Union, gathered in Brussels, took a major step forward by agreeing on a common text to establish a Single Supervisory Mechanism. Negotiations with the European Parliament, national approvals and implementation are the next priorities. The Single Supervisory Mechanism is a logical next step in improving the framework for a common European capital market. It will ensure a consistent application of regulatory standards and will enable supervisors to reach a common understanding of the soundness of the banking sector.
In this context, the clear delineation of responsibilities in line with the principle of subsidiarity is essential for the German government. Once the Single Supervisory Mechanism is established, the ECB will be responsible for the supervision of those credit institutions which are deemed "significant" — around 150 credit institutions in the Euro Area according to today’s data. The competence for supervising the remaining banks will remain at the national level. We expect the ECB to start to carry out its supervisory functions not before March 2014.
Regulatory reform at the European level will then need to follow on from there. In this context, the European Council has already in principle envisaged the project of a Single Resolution Mechanism, for which the European Commission has been tasked to submit a first proposal in the course of the year 2013.
We have done a lot, and continue to do a lot, to improve our economic competitiveness and thus our attractiveness to investors. The two crucial issues that will stay in focus over the coming months and years are, first, the global backdrop for our efforts to regain a solid economic footing for the Eurozone, and, second, the implications that the crises have had for the global framework of price stability.
Deficit reduction remains crucial
The global outlook remains uncertain and the temptation to ignore the lessons of the past is increasing. In large parts of Europe, we are facing subdued confidence levels and tepid growth. While the economic situation elsewhere may be improving, G20 nations must not waver in their commitment to halve their deficits by 2013 — a commitment that looks now in danger of being broken by some. We have agreed to stabilize our public debts by 2016 and should do so. Moreover, we should develop these commitments to fiscal stability even further and set ourselves new deficit and debt goals beyond 2016. The European Union member states are already bound to bring down their debt levels to below 60% of GDP under the EU’s fiscal rules. In this spirit, the finance ministers of the G20 pledged at their recent meeting in Moscow to develop credible medium-term fiscal strategies that build on our existing commitments by the St-Petersburg summit in September.
Secondly, confidence in financial markets requires that the European Central Bank’s commitment to price stability should not be questioned. Price stability is the ECB’s first goal. Everything else, including growth and financial stability-related policy targets, is subordinated to it. Therefore, it must be clear that extraordinary monetary policy measures can only be temporary. The European Central Bank has played, and continues to play, an important role in our efforts to overcome the recent crises. But a lasting solution will not come from monetary policy but primarily from fiscal and structural adjustments in the individual Member States, as well as on restructuring, cost-cutting and shrinking of balance sheets in their banking sectors. In fact, while the extraordinary policy measures bought time to solve the problems, they have done so at a cost. This implies that if the time bought was not used effectively to solve the issues at stake, we would be worse off.
In this context, there can be no serious disagreement that exchange rates are no meaningful policy target. Regarding the Euro, its moderate appreciation in recent months has coincided with rising confidence in the Eurozone. I would also caution against a tendency we have seen in recent years — and not just in Europe — to blame self-inflicted woes on currency movements. Exchange rates and warnings of "currency wars" can be no excuse not to address domestic economic challenges.
To sum up, we in Germany intend to fully play our part in the effort to make Europe more attractive to investors. Considering the challenges that had to be faced in the past years, this Government has been highly successful in maintaining the international repute of the German and European capital markets, and we intend to continue in that spirit over the coming years.