Lately there have been widespread fears that the Greek government might not be in a position to honor its debt repayments during March, which amount at €2.5bn (€1416mn in repayments to the IMF, €800mn in interest payments and €280mn in other obligations). Although I agree that things are getting quite tight, I do not think that a ‘failure to pay’ is imminent. Such an issue will emerge mainly during the summer (in July and August) when Greece will have to pay a total of €8.81bn (with the bulk belonging to €6.68bn of ECB SMP bonds which mature then).

Lets start from the easy facts. Greece will not be receiving any funds from the official creditors until a successful completion of the current review for the bailout package. This also includes €1.9bn in SMP profits which have already been remitted by the ECB to Eurozone countries. Moreover, the limit for short-term T-Bills issuance (at €15bn) has already been reached and the ECB/SSM does not seem to be keen in (temporarily) increasing it.

According to the BoG January data, the central government budget balance on a cash basis (which is the one we are mainly interested in) was negative both for the primary and overall figures (€150mn primary deficit and €220mn overall). At least during January, revenue registered a substantial shortfall of €1.33mn compared to the same month for 2014 which was the main factor that drove the balance to deficit compared to a positive net balance of €600mn during January 2014. Obviously, unless the Greek government succeeds in improving tax collection significantly, the revenue shortfall will quickly create very serious problems for its financial position.

Nevertheless, apart from monthly revenue and expenditure flows, the Greek government also holds substantial liquid assets. Unfortunately, most statistical data are published with large lags (for instance we still don’t have the January figures for the BoG balance sheet) and usually refer to the general government. Given that the central government is taking measures in order for general government entities to ‘invest’ their surplus funds in repos with the central government, we can draw an overall picture based on the data available.

BoG annual accounts for 2014 show that the Greek general government held around €3.5bn in its accounts at the central bank. Additionally, the BoG bank deposits data (with January figures released a few days ago) do provide a detailed breakdown of deposits by government branch:

Greek government bank depositsIt is evident that, although the government financial position has deteriorated during the last few months (with deposits falling from €14bn to €12.26bn), the central government still holds substantial liquid deposits in the banking system which stood at €6.66bn at the end of January. Moreover, social security funds held €3bn in sight deposits while local governments another €1.8bn. Obviously a large part of the above funds are used in day-to-day operations (pension payments for example exceed €2bn per month) yet clearly substantial assets exist which could be used in an ‘emergency’ situation. The Greek government could also probably make use of the Greek pension funds ‘common capital’ which is invested in Greek government bonds and T-Bills and is currently valued at around €5-6bn.

Based on the government balance during January, deposit data, BoG 2014 balance sheet and debt payments in January (€1.6bn), the Greek general government should still have over €13bn in deposits at the BoG and Greek banks (the actual figure will depend on the budget execution during February). Moreover, BoG will be paying a dividend of €640mn during March which will provide a substantial windfall revenue for the government.

As a result, the actual data do not point to the Greek government having an immediate liquidity problem, at least during March. The main issue is one of a political nature since the Greek state is slowly getting inτο a position where it has to decide whether to prioritize debt repayments towards the official sector or immediate relief for its citizens while also achieving timely clearance of arrears and execution of scheduled payments. Obviously the current situation quickly reduces the government’s ‘degrees of freedom’ and strengthens the creditor position who can just ‘sit and wait’ for Syriza to slowly give in to all their demands. Given the schedule of debt repayments this stand-off will end in one form or another in the summer (June also includes a large sum of €2.62bn in payments).

One last possible problem is the ELA caps set by the ECB. In order for the Greek government to use bank deposits to pay maturing debt, the funds will have to be transferred to its account at the BoG and eventually increase Target2 liabilities. As a result, the transfer will require an equal increase in ELA financing, the terms of which (total amount and collateral framework) are set (up to a point) by the ECB governing council.

Since the second 3Y LTRO matured this week while the ECB QE starts in a few days it is interesting to take a quick look at the overall liquidity position of the European banking system. According to the latest Eurosystem weekly statement, lending through regular refinancing operations (MRO and LTROs) was €501.3bn during the preceding week (this does not include the sizable ELA lending of Greek banks which appears to have increased by €5.6bn).

Based on the outstanding OMOs, total lending now stands at €488,3bn. A large part of the maturing 3Y LTRO was replaced by higher MRO lending (which increased to €165.35bn from €122.11bn in the previous week) yet overall financing was €13bn lower and now stands at less than €500bn. In other words, total bank financing is now close to the allotted amounts of each of the two 3Y LTROs (first: €489.2bn, second: €529.5bn).

Obviously the European banking system has lowered its reliance on Eurosystem financing substantially. It seems that any increase in the Eurosystem balance sheet will only be the product of outright purchases through the ABSPP/CBPP3 and government bond program. It is even probable that individual banks will use the newly created reserves in order to reduce their reliance on Eurosystem financing and free encumbered collateral which will result in lower MRO allotments in the next few weeks. Consequently, one should observe almost immediate effects on repo market rates and turnover by the upcoming ECB QE purchases.

Since I recently submitted my MSc in Finance dissertation titled «The informational content of SMP deposit auctions in forecasting short-term repurchase agreement interest rates», I would like to take the opportunity to write a few words on its conclusions. The main objective of the research was to examine whether SMP deposit auctions carried valuable information for forecasting short-term repo rates. Since banks with excess liquidity always faced the choice between parking their reserves at the weekly term-deposits for a week or lending them in the GC repo market, SMP deposit rates should act as an effective floor on risk-free money market rates.

In order to evaluate the above hypothesis the paper first suggested a stochastic model for the bid rate in auctions (based mainly on the level of excess reserves in the system) as well as the conditional variance of the bid rate process (the calculation suggested that the variance was not steady but a function of excess reserves therefore implying that a possible econometric specification would face heteroskedasticity problems).

The econometric specification used a cointegrating relationship between the weekly GC and SMP deposits rate in a VEC model also containing excess bids, number of bids and the VIX index (as a proxy of market stress) as explanatory variables. A competing VAR model of the MRO and GC rate was estimated and out of sample forecasts of the GC rate for the two models were compared. The results clearly indicated that the SMP deposits did provide significant informational content for short-term money market rates.

A few people might find the (very) large section in monetary policy and repo market details informative and helpful. Overall the paper is quite technical but I hope relevant for evaluating the effectiveness of certain sterilization tools used by central banks in recent years. It might prove useful in analyzing related facilities used by the Federal Reserve (such as Interest on Reserves and the overnight and term reverse repo facilities), a topic that interests myself as well.

Το ΚΕΠΕ στο μηνιαίο δελτίο οικονομικών εξελίξεων του Ιανουαρίου 2015 συμπεριέλαβε ένα άρθρο πάνω στους δημοσιονομικούς πολλαπλασιαστές της χώρας το οποίο έλαβε αρκετά μεγάλη κάλυψη στον τύπο (όπως θα ήταν αναμενόμενο άλλωστε). Μιας και το θέμα των πολλαπλασιαστών είναι κάτι που παρακολουθώ στενά καθώς είναι άμεσα συνδεδεμένο με τις επιπτώσεις του προγράμματος προσαρμογής πάνω στην Ελληνική οικονομία θα ήθελα να γράψω δύο λόγια για την μελέτη (τα οποία θα είναι περισσότερα τεχνικά από ότι συνήθως).

Η μελέτη πραγματοποιεί μία οικονομετρική εκτίμηση των δημοσιονομικών πολλαπλασιαστών δαπανών και φόρων (συνολικά αλλά και ανά ευρεία κατηγορία δαπανών/φόρων) με βάση ένα structural VAR μοντέλο. Προκειμένου να εκτιμήσει τους πολλαπλασιαστές στη διάρκεια της ύφεσης και αν αυτοί είναι διαφορετικοί από το συνολικό δείγμα (1999 με 2013) προσθέτει και ένα dummy variable από το 2008Q2 και μετά. Στο άρθρο παρουσιάζονται οι ‘αθροιστικοί δημοσιονομικοί πολλαπλασιαστές’ (accumulated impulse responses) για τις δύο εκτιμήσεις:

KEPE - Greek Fiscal Multipliers

Όπως είναι φανερό, με βάση την εκτίμηση του ΚΕΠΕ, οι πολλαπλασιαστές της δημόσιας κατανάλωσης είναι αρνητικοί ενώ μόνο η δημόσια επένδυση είναι υψηλότερη από την μονάδα. Ο πολλαπλασιαστής των άμεσων φόρων είναι αρνητικός και ίσος περίπου με -2 ενώ και των έμμεσων φόρων σημαντικά υψηλός και ίσος με -0,8. Η εξήγηση που δίνεται έχει να κάνει κυρίως με την υψηλή ροπή για εισαγωγές της οικονομίας η οποία συνεπάγεται το leakage των δαπανών προς το εξωτερικό ενώ η στρεβλωτική επίδραση των άμεσων φόρων είναι σημαντική. Το προφανές συμπέρασμα είναι ότι το μείγμα της προσαρμογής θα πρέπει να είναι προσανατολισμένο στην μείωση της δημόσιας κατανάλωσης, στη στήριξη των επενδύσεων και την μείωση των στρεβλωτικών άμεσων φόρων.

Πάμε τώρα στην κριτική. Κατ’ αρχήν από πλευράς παρουσίασης η μελέτη είναι το λιγότερο εξαιρετικά ελλιπής. Το μόνο που παρουσιάζεται είναι ο πίνακας των impulse responses και ακόμα και αυτός χωρίς confidence intervals. Η ακριβής μορφή του VAR estimation με τις τιμές και τα standard errors των coefficients όπως και τα στατιστικά για τη συνολική εκτίμηση (R², information criteria κτλ) ή στοιχεία για το stationarity των μεταβλητών που χρησιμοποιούνται απλά δεν υπάρχουν πουθενά. Ο αναγνώστης καλείται να πιστέψει το συγγραφέα ότι η εκτίμηση έγινε με τον καλύτερο δυνατό τρόπο.

Από εκεί και πέρα θεωρώ ότι το specification που ακολουθήθηκε είναι λανθασμένο. Η υπόθεση ότι οι πολλαπλασιαστές είναι διαφορετικοί στο expansion από ότι στο recession συνεπάγεται ότι το μοντέλο πρέπει να προβλέπει διαφορετικά coefficients ανά regime, κάτι το οποίο γίνεται με TAR/STAR σε AR μοντέλα και TVAR/STVAR σε VAR υποδείγματα. Το ‘state of the art’ μοντέλο είναι το (Auerbach & Gorodnichenko, 2012) το οποίο και πρότεινε αρχικά το STVAR μοντέλο. Αυτό έχει χρησιμοποιηθεί σε μία σειρά από ερευνητικές εργασίες τόσο του ΔΝΤ (για το G-7 και άλλες περιπτώσεις), όσο και της Eurobank η οποία υπολόγισε τους δημοσιονομικούς πολλαπλασιαστές στην Ελληνική περίπτωση. Η εκτίμηση της είναι πολύ διαφορετική από του ΚΕΠΕ καθώς ο πολλαπλασιαστής δαπανών βρέθηκε ίσος με -1,42 στα expansions (και μη στατιστικά σημαντικός) και 1,32 στο recession (και στατιστικά σημαντικός).

Μιας και σε πολλές περιπτώσεις ένα VAR μοντέλο δε διαφέρει από μία σειρά απλών AR specifications τα οποία εκτιμώνται με OLS ας προσπαθήσω να εξηγήσω απλά ποιο είναι το misspecification του ΚΕΠΕ. Γενικά μία από τις βασικές παραδοχές στην εκτίμηση οικονομετρικών μοντέλων είναι η σταθερότητα των συντελεστών. Αν αυτοί δεν είναι σταθεροί αλλά το slope αλλάζει ανά regime τότε πρέπει να βρούμε τρόπο να εισάγουμε κάτι τέτοιο στο μοντέλο, διαφορετικά ουσιαστικά θα εκτιμούμε ένα weighted average διαφορετικών coefficients (που θα εξαρτάται από τη συμμετοχή του κάθε regime στα δεδομένα μας). Σε ένα plain vanilla AR(1) μοντέλο ένας απλός τρόπος είναι να εκτιμήσουμε ένα Threshold AR specification όπου ένα dummy θα καθορίζει το regime στο οποίο βρισκόμαστε. Δηλαδή:

ScreenHunter_08 Jan. 24 11.42

Πιο ‘εξελιγμένα’ μοντέλα επιτρέπουν την ομαλή, συνεχή μετάβαση μεταξύ των regime, κάτι το οποίο κάνει το STAR/STVAR αλλά με κόστος την πολύ μεγαλύτερη περιπλοκότητα και δυσκολία στην εκτίμηση (ενώ αν οι μεταβάσεις είναι σύντομες η προσέγγιση με TAR δεν είναι προβληματική). Το ΚΕΠΕ, εισάγοντας ένα dummy variable για τον καιρό της κρίσης αυτό το οποίο εκτίμησε ήταν:

ScreenHunter_09 Jan. 24 11.42

Ουσιαστικά δηλαδή θεωρεί ότι ο slope coefficient μένει σταθερός και αυτό το οποίο αλλάζει είναι το conditional mean. Αν μάλιστα το φ2 αλλάζει στο specification με το dummy (που δεν είναι παράλογο με δεδομένα τα αποτελέσματα της Eurobank) τότε ουσιαστικά ένα impulse response θα παρουσιάζει το ‘μέσο όρο’ αυτών των δύο μεταβλητών και οι προβλέψεις δε θα είναι κοντά στην πραγματικότητα. Προφανώς τα δύο μοντέλα είναι εντελώς διαφορετικά μεταξύ τους και η εκτίμηση που θα δώσουν για την επίδραση shocks θα είναι επίσης διαφορετική. Δεν είναι περίεργο λοιπόν που οι προβλέψεις του μοντέλου του ΚΕΠΕ έχουν πολύ μεγάλη απόσταση από αυτές της Eurobank. Σαφώς θα ήθελα να μπορώ να δω τις λεπτομέρειες της εκτίμησης που έκανε ο συγγραφέας αλλά με τα διαθέσιμα δεδομένα δε θεωρώ ότι τα αποτελέσματα της μελέτης είναι συνεπή.

This will be a quick follow-up post on the 2014Q3 employment figures post. The Greek Ministry of Employment publishes monthly figures of employment announcements by employers on an online registration system called ‘Ergani’. Based on the recently announced numbers for December of 2014 (sorry the document is in Greek) I ‘d like to make a few projections on the current state of unemployment in Greece:

Greece Net Employment figures 2014H2 - Ergani

It is quite evident that net employment flows were negative during 2014H2 due to 2014Q4 dynamics (which are not yet reflected on the unemployment survey numbers published by ELSTAT). Compared to 2013 the total difference was 120,000 jobs (from a positive net flow of 43,000 jobs to an outflow of 77,000 employees) with the fourth quarter loosing almost 90,000 jobs, a figure close to three times that of 2013.

Since seasonal adjustment of employment is always a smoothing mechanism which requires a large number of observations my feeling is that October/November monthly employment surveys, as well as the quarterly 2014Q4 survey, will register a significant fall in employment which might result into an increase of the unemployment rate. With a labour force of 4,830 thousand people, the 88,000 jobs shortfall during 2014Q4 is equal to almost 2% which should appear in the unemployment numbers during the upcoming months. Something to definitely keep an eye on.

So it seems that a European QE program is highly probable although Greek government debt is at risk of not being included since it is not rated investment grade and the ECB will only include it in the list of assets purchased if Greece remains in a refinancing program.

In this short post I ‘d like to note a few things on the magnitude of the impact that such a program would have on Greek bonds. Based on the Greek ECB capital key (2%) and the anticipated QE size (which most analysts put around €500bn), the ECB might end up buying around €10bn of Greek debt securities. PSI related bonds principal is now around €29.6bn while long-term bonds issued by the Greek government during 2014 totaled another €6.9bn. Bonds with a residual maturity of up to 10 years are only €12,2bn which, given current market prices, are worth much less than €10bn.

Greek bonds till 2029

As a result, ECB will ultimately be making a bid for all the outstanding market value of long-term Greek bonds (with a residual maturity of up to 10 years), increasing liquidity in the bond market considerably (and making it the largest holder of Greek debt). That will obviously drive current market prices much higher and also allow the Greek government to immediately return to the market since bidders will have a (free) put option of selling most of their holdings to the ECB. As long as the upcoming QE is pari passu with private bondholders (as is the OMT program) and the Greek government establishes a credit line program (which creates another put option for bondholders) the (QE) program will allow an orderly return of the Greek government to private bond markets.

Since the Greek debt maturity profile suggests that only mostly 2015 and 2019 are years that involve large debt refinancing needs (which lowers any default risk post 2015) a QE program will have long-lasting stabilization effects. These effects will be even higher if ECB profits from the program are returned to the corresponding Treasuries (which I suspect will happen if eventually the program involves each NCB buying its own government debt securities).

nov14 Greek debt maturity profile en

Personally I would also like to see a second buyback of Greek debt to take advantage of low market prices and also to lower the nominal value of post-PSI bonds which, due to the EFSF co-financing scheme, are senior to newer bonds issued by the Greek government (a fact that can create difficulties for Greece issuing bonds that have similar maturity dates as outstanding PSI bonds). A possible buyback could be combined with an exchange offer to consolidate the current series (which stretch a 20 year period with low nominal values per bond of less than €1.5bn) into two or three securities that will be of much larger nominal value and liquidity and thus improve market making and secondary market trading.

I ‘ve been bogged down with my PhD courses lately and this blog has not seen the share of posts that it was accustomed to. In any case, since I ‘m looking back into our Macro 1 course (which is based mainly on the Romer and Blanchard books, both quite informative and good to have) I ‘d like to touch on the math of the Ricardian Equivalence and the Government Budget Constraint.

As is well known, the Ricardian Equivalence (RE) states that only the quantity of government purchases, not the division of the financing of those purchases between taxes and bonds, affects the economy. This is based on the household budget constraint of a Ramsey model where the government budget constraint (with equality) is applied. What the latter suggests is that the government must run primary surpluses large enough in present value to offset its initial debt.

Usually the government budget constraint is taken at face value by most economists while Ricardian Equivalence is suggested that it might not be (completely) valid in practice due to facts such as short-term horizons, liquidity constraints, different interest rates faced by the government and households and the Zero Level Bound. Nevertheless, I ‘m not so sure that a lot of people would disagree with the RE model in its original form (a very nice reference for both issues is chapter 12 of Romer).

In this post I would like to support the proposition that mathematically both the RE and the government budget constraint require the assumption that, at the infinite horizon limit, private household net financial wealth is zero. Households only gain utility from consumption so, at the limit, they will consume all financial wealth they hold which suggests that the present value of government primary surpluses should be equal to government debt.

Obviously this only works in a world where money is neutral and ultimately is only used as a transactions medium and not as a store of value to hedge an uncertain future. The notion of «safe assets» does not really enter into the realm of the Ramsey model where the representative agent either has perfect foresight or faces stochastic risk (and not genuine uncertainty).

As Philip Arestis elegantly states, «all economic agents with their rational expectations are perfectly creditworthy. All IOUs in the economy can, and would, be accepted in exchange. There is thus not need for a specific monetary asset. All fixed-interest financial assets are identical so that there is a single rate of interest in any period.»

Once this assumption is relaxed and the private sector requires a safe store of value not only to facilitate wealth maintenance but even the daily flow of transactions (with government debt securities playing a crucial role in monetary policy operations and the repo markets), the government budget constraint breaks down while an increase in the supply of government debt can even be stabilizing (see for example the relevant Treasury programs during the 2008 credit crisis) and is required in order for the private sector to maintain its wealth in a safe store of value, free from shocks that might emerge in an uncertain world.

Further, mathematical details can be found in the attached (small) pdf document.

Government Budget Constraint – Ricardian Equivalence

Greek ELSTAT released the unemployment figures for 2014Q3 today which marked the fall of the unemployment rate to 25.5%, down from 27.2% during the corresponding quarter of 2013. Given the positive outlook of the release I ‘d like to take a closer look at the details of Greek employment and if this drop of the unemployment rate really signifies a substantial improvement of the economy.

Based on various tables of the quarterly employment figures I have constructed the following table of certain numbers that I feel are important:

Greek employment 2013Q3 - 2014Q3

Personally I usually pass through the unemployment rate and go straight to the employment figure. As we can see, although unemployment dropped by 91 thousand people (compared to the same quarter of 2013), employment increased by 53 thousand which resulted in the labor force decreasing by 38,000. What is even more interesting is the fact that a large part of the drop in the labor force was due to a fall of the population over 15yr (-30,000). Obviously the fall in the unemployment rate becomes much less impressive if one looks only at employment while the (steady) fall in the 15+ population and the labor force are certainly not positive signs for the future.

Taking a closer look at the unemployed we see that the fall in that category was only due to people who were unemployed for less than a year while the long-term unemployed actually increased by another 10 thousand to reach close to 930,000 persons. These opposite movements are a worrying sign for the future since they might be indicators for the presence of hysteresis among the long-term unemployment. This will make reducing unemployment much more difficult (given that short-term unemployed are only 6% of the labor force with long-term unemployment reaching 19%).

Moving to employment we observe that the increase came almost entirely from part-time employment. If one also notices that under-employment was the major driver of employment (with under-employed now being close to 6.8% of employment) it is clear that employment growth is driven mainly by short-term, part-time unsecured jobs which probably pay very low salaries. The fall in the unemployment rate actually hides an increase in under-utilization of labor which finds it very hard to enter into full-time steady jobs while long-term unemployed seem to be left out of even these part-time employment opportunities.

Given the recent substantial increase in Greek political risk and the high probability of early elections I ‘d like to comment on a recurring theory that ECB can threaten to close down Greek banks access to liquidity (in the same manner it did in Cyprus) in case that a newly elected Syriza government does not adhere to the currently agreed upon measures, reforms and budget cuts.

In my view, 2015 is quite different than 2012 and the possible threats that the ECB could (then) make against Greece are no longer possible.

The main measure that the ECB can take against Greece in case that the current program is put on hold is to remove the waiver on accepting Greek government guaranteed securities and other assets as collateral in its regular refinancing operations. The important fact to keep in mind though is that Greek banks do not hold significant amounts of Greek government bonds on their balance sheets any more. They only have a little over €10bn of relevant securities of which almost €5bn are Treasury Bills. The collateral being used in ECB operations are mainly the EFSF notes that banks acquired from the Hellenic Financial Stability Fund (HFSF) when they were recapitalized after the PSI. The nominal value of these notes exceeds €37bn which coupled with other assets (such as credit claims) covers current ECB financing which stands close to €45bn.

Any additional financing requirements can be covered through ELA financing although this will necessarily result into much higher borrowing costs (since the ELA rate is more than 150bps higher than the ECB marginal lending rate). The threat of closing down ELA (as in Cyprus during 2013) is only possible if the Greek banks do not cover minimum capital requirements. Given that it’s only been a few weeks since the ECB stress test results were announced during which the central bank affirmed the strong capital position of Greek banking institutions it is not at all clear how the ECB would be able to justify not allowing or placing hard limits on ELA financing.

Moreover, even if negotiations between Greece and its creditors go south this cannot have any effect on the EFSF notes held by banks since any principal and interest payments on EFSF loans will be made after 2020 (interest payments have been deferred and capitalized until at least 2022). Coupon payments on PSI bonds (including bonds issued during 2014) stand around €1bn per year and do not create substantial problems. Unfortunately the EFSF loan does contain cross default clauses referring to the rest of Greek obligations so a future Greek government should proceed with caution although the Greek law covering ECB SMP bonds does provide some room to maneuver* .

Greek debt payments during 2015 mainly involve T-Bill rollovers and payments of €7bn towards the ECB (for SMP bonds) and €9bn towards the IMF:

Greek Bonds T-Bills 2015

ECB’s main leverage over Greece concerns whether liquidity will be provided through regular OMOs or ELA and if Greek bonds will be included in a possible future QE program. The latter will obviously allow a much more orderly access to capital markets for bond issuance, especially coupled with the presence of an EFSF ECCL program.

* When I first wrote the post I had in mind that ECB Greek bonds are covered by Greek law. It turns that the ‘default events’ on the EFSF financing agreement cover more or less all of Greek government liabilities.

Recently I was going through the German real Investment by type of good (based on Ameco data) and noticed something quite interesting:

Germany Real Gross Fixed Capital Formation

Breaking down investment in three major categories and using 1991 as base year we see that:

  1. Non-residential construction increased for a few years after the re-unification until 1995 and then went on a long-term secular decline path until mid-2000’s. Since then it has remained roughly stable between 80-90% of the 1991 value.
  2. Equipment investment went through large long-term swings and a large ‘bubble’ between 2004 and 2008. It regained a large part of the 2009 losses but appears to be on a stable path around 130%.
  3. Residential construction (dwellings) is the most interesting. It increased significantly after re-unification until the end of the 1990’s decade after which Germany went through a ‘balance sheet recession’ correction with construction slowly returning back to 1991 levels. But since 2009 construction has rebounded strongly and is now 20% higher than the trough.

Residential construction can account for a part of Germany’s positive growth since 2009. In contrast to earlier Euro years, (real) house prices are now in positive territory fueling new construction and a wealth effect for house owners (who can increase their consumption). This allows the German economy to decouple up to a point from the rest of the Eurozone and achieve growth based on internal demand (which is now the main contributor to overall growth and not external net demand).

Germany Real House Price Yearly %change

If this picture continues for the upcoming years we might see a structural change in the Savings – Investment surplus of Germany which will obviously affect its current account. This will also depend on the future fiscal stance of course.

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