While external factors were the driving force behind the upturn in the German economy during the rebound that followed the financial and economic crisis, growth in Germany has been sustained for some time now by domestic activity. The dynamics of economic growth have thus changed, a development that is primarily attributable to the buoyant German economy. Given the macroeconomic improvement, the Bundesbank forecasts real GDP growth of 1.7% for 2014 and of around 2.0% for 2015.
In 2013, Germany’s overall current account surplus remained high. In the rest of the euro area, however, the surplus has halved since 2007, from 4.5% of GDP to 2% of GDP, mirroring the economic improvements in the crisis countries. Although it has been at an elevated level since the mid-2000s, Germany’s surplus is the result of market processes. As the European Commission pointed out in its in-depth review, the surplus is the result of an interplay of various factors and developments within Germany as well as at a global level and among its euro-area partners, which affected savings and investment in the domestic economy.
Moreover, due to its demographics and development status, Germany’s role as a capital exporter is unlikely to change, meaning that its current account is likely to remain in positive territory in the future. Nevertheless, by removing rigidities in the services sector, Germany could strengthen its growth potential in a way that is likely to have a moderating impact on the current account.
Returning confidence
Germany’s reduced surplus vis-à-vis the rest of the euro area is not the only sign that adjustment is well underway. The improvements in the current account balances of the euro-area periphery countries have been the result not only of shrinking imports, but also of expanding exports. Factors of production are being reallocated from the non-tradable to the tradable sector.
As a result, confidence is slowly returning, expressed, for example, in the falling spreads of sovereign bonds issued by the periphery countries. The stabilisation of euro-area developments is reflected by the fact that the Bundesbank did not have to further increase its risk provisions in 2013, as was the case in previous years. Consequently, the Bundesbank’s profit for 2013 amounts to €4.6bn, up from €0.7bn in 2012.
The current improvements in financial market confidence reflect the better macroeconomic outlook and the structural reforms undertaken. But it is premature to declare the end of the sovereign debt crisis. The euro-area countries have taken steps to resolve the crisis, but more needs to be done in order to stick to this path. Structural change is of key importance as some countries need to regain competitiveness.
Additionally, debt levels, both private and public, are still worryingly high in some euro-area countries. In order to permanently put European monetary union (EMU) on a more solid footing, further steps are needed on the institutional side, too. In this regard, the banking union that is currently under construction constitutes the greatest change in the European financial architecture since the introduction of the single currency.
The banking union comprises, as its first pillar, a European Single Supervisory Mechanism (SSM), which is located at the European Central Bank and which will work according to uniform rules and high standards. The establishment of the SSM is a response to the emergence of various shortcomings in national banking supervision in a number of member states. The move to joint and uniform banking supervision in Europe should thus play a key part in improving financial stability in the euro area.
Comprehensive assessment
Before the SSM’s launch, among other things, a comprehensive assessment consisting of a risk assessment, balance sheet assessment and stress test exercise is being conducted for the 128 banks (including 24 German banks) currently classified as “significant”. In future, such institutions will be supervised directly by the ECB. The comprehensive assessment is being performed by the ECB in close co-operation with the national competent authorities and the European Banking Authority.
If the balance sheet assessment reveals that individual institutions need recapitalising, this is to be covered before the start of the SSM. Primarily, private funds are to be used for this purpose. If this is not possible and the bank possesses a sustainable business model, it may be recapitalised by the government of its home country.
Direct recapitalisation of banks by the other member states is not appropriate, however. This is in keeping with the logic that the elimination of balance sheet legacy burdens is a matter of liability for past failings in national banking supervision, primary responsibility for which lay with the individual member states and not with the other countries of the EU or at the Community level.
A Single Resolution Mechanism will be established as the second pillar of the banking union. The guiding precept behind this mechanism is the “bail-in” principle — the basic rule that, in a market economy, enterprises and investors must bear the risk of their actions. As a consequence, ailing banks may face restructuring or even resolution. A crucial condition for this, however, is that this can be done without endangering financial stability and, wherever possible, without using taxpayers’ money. In the event of recovery and resolution proceedings, it is therefore envisaged that banks’ owners and creditors will bear an appropriate share of the losses. It is only after this that a common resolution fund financed by the banking sector will step in. Public funds are to be used only as a last resort, and then only if financial stability would otherwise be jeopardised.
