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10.08.2015 • 30/2015

Germany Benefited Substantially from the Greek Crisis

The balanced budget in Germany is largely the result of lower interest payments due to the European debt crisis. Research from the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association shows that the debt crisis resulted in a reduction in German bund rates of about 300 basis points (BP), yielding interest savings of more than EUR 100 billion (or more than 3% of gross domestic product, GDP) during the period 2010 to 2015. A significant part of this reduction is directly attributable to the Greek crisis. When discussing the costs to the German tax payer of saving Greece, these benefits should not be overlooked, as they tend to be larger than the expenses, even in a scenario where Greece does not repay any of its debts.

Reint E. Gropp
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EFN Report Summer 2015: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 3, 2015
Abstract
External conditions for the euro area economy are still favourable, albeit somewhat less so than at the beginning of the year. Oil prices are by more than a third lower than they were on average in 2014, but about 10 USD higher than in January. Long term interest rates are still very low, but by half a percentage point higher than in January. Worldwide growth in production and trade has disappointed in the first quarter of 2015, and recent leading indicators point to no more than a slightly faster expansion of world production for the rest of the year. The risks of contagion from the Greek crisis to the partner countries appear limited, because financial exposure to the Greek banking sector has been very much reduced. The EU nowadays has instruments with considerable power to fight losses of confidence, and the other countries that received financial assistance in the euro crisis appear politically much more stable, and their economies (including that of Cyprus in the first quarter of this year) have started growing at quite satisfactory rates. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 2.1% in 2016, as negative factors slowly become less important. Both private consumption and investment will expand at a good pace, and the unemployment rate will diminish, but still remain above 10% by the end of 2016. The main risk is that the Greek crisis has a more negative effect on confidence than initially expected. Our inflation forecast for 2015 is 0.2%, with the possibility of a mild deflation not excluded. During the first quarter of 2015 rising oil prices were the main contributors to the ascending inflation expectations, while during the second quarter upward surprises over expected inflation have come from manufactured goods and services. For 2016, we expect that inflation will increase up to 1.2%, still below the 2% ECB’s target.
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Consequences of China’s Opening to Foreign Banks

Ran Li, Xiang Li, Wen Lei, Yiping Huang
L. Song, R. Garnaut, C. Fang, L. Johnston (Hrsg.), China's Domestic Transformation in a Global Context. Acton: ANU Press, forthcoming
Abstract
China’s government has recently implemented additional reforms to relax the regulatory environment for foreign banks. Specifically, State Council Order No. 657, signed by Premier Li Keqiang, announced a decision to revise the Regulations of the People’s Republic of China on the Administration of Foreign-Funded Banks, effective from 1 January 2015. Implications of the revised regulations include removal of the requirement that a minimum of RMB100 million operating capital be transferred unconditionally from the overseas parent bank to the newly opened Chinese branch. In addition, in terms of the conditions attached to the right to carry out RMB-denominated activity, foreign banks are now eligible to apply to undertake local currency business after operating in China for one year—down from the previous three years. The requirement for two consecutive years of profit will be scrapped as well.
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EFN Report Spring 2015: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 2, 2015
Abstract
Recent movements on world markets for commodities, currencies and capital stimulate the world economy, but they entail also considerable risks: income losses of energy exporting countries might trigger financial crises with worldwide repercussions; crises might also emerge from financial distress of emerging market debtors with liabilities denominated in US dollars. Extremely low interest rates might not only trigger stock and bond price booms, but also more volatility if investors become fearful of financial bubbles. Quite a few conditions are highly beneficial for a recovery of the euro area economy: governments and large corporations benefit from ultra-low bond yields, banks’ composite costs of debt financing have been converging during the past two years to very low levels, and borrowing costs for non-financial corporations have come down markedly. Prices for stocks, bonds and (on average) houses have gone up. Real disposable incomes of private households have risen due to oil prices. The real effective exchange rate is about 10% lower in March 2015 than it was a year ago, strengthening the price competitiveness of firms in the euro area. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 2.1% in 2016. Structural impediments, however, still limit the ability of the euro area economy to grow strongly: firms and, in particular, private households are only slowly reducing their heavy debt burdens, and confidence will not fully come back in France and Italy, as long as reform processes are inconclusive in both countries and as long as unemployment is not coming down markedly. Our inflation forecast for 2015 is 0.1%, with the possibility of a mild deflation not excluded. In 2016 inflation will increase up to 1.3%, still clearly below the 2% ECB’s target. This calls for continued monetary expansion, though its effects could be limited in the absence of a complementary fiscal stimulus, in particular in those countries where the implementation of structural reforms brings long term gains but short term losses.
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EFN Report Winter 2014/15: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 1, 2015
Abstract
At the beginning of the year 2015 crude oil is, with little more than 50 dollars per barrel (Brent), about 50% cheaper than in the summer 2014. The oil price hike is a stimulus for the whole world economy, even though the gains of energy users are matched by losses of the suppliers: oil producing countries frequently run high current account surpluses vis-à-vis the rest of the world. It is therefore plausible to assume that, reacting to the redistribution of incomes, the oil user countries will increase their spending by more than what will be lost in spending by producers. Investment activity in the euro area has recently been particularly weak. Remarkably, investment in Greece, Portugal, and Spain, i.e. in countries that had to accept international support during the euro crisis, has strengthened. The setback took place in the so-called core countries, including Germany. Consumption growth was also subdued. Lower oil prices, by increasing real incomes of consumers and lowering production costs for firms, should increase private consumption and, in particular, investment. Moreover, the depreciation of the euro will favour exports. Overall, according to our forecasts, the euro area GDP will grow by 1.3% in 2015 and by 1.6% in 2016. GDP growth is about 0.3 percentage points higher due to the impact of lower oil prices in 2015. However, these forecasts are subject to substantial uncertainty, and we do not see any significant reduction of the unemployment rate during the forecasting horizon. Our inflation forecast for 2015 is 0.3%, with the possibility of a mild deflation not excluded. In 2016 inflation will increase up to 1.1%, still clearly below the 2% ECB’s target. This calls for further monetary expansion, though its effects could be limited in the absence of a complementary fiscal stimulus. The expansionary cyclical policies should be combined with more structural reforms to enhance the competitiveness of the euro area and its growth potential, which in our forecasts remains quite limited. In fact, we expect potential output to grow by only 0.4% both in 2015 and 2016.
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Network Positioning, Co-Location or Both?

Muhamed Kudic
Innovation Networks in the German Laser Industry. Springer Cham, 2015
Abstract
Previous research indicates that firm innovativeness can either be determined by a firm’s position within the network dimension or by its position within the geographical dimension. Integrative studies addressing both distinct and combined proximity effects remains rare (cf. Whittington et al. 2009). Thus, we address in this Chapter the following research question: Are firm-level innovation outcomes positively or negatively related to network positioning effects, geographical co-location effects or combined proximity effects; and if the latter case is true, are the combined effects substitutional or complementary in nature? Panel data count models with fixed and random effects were used to analyze a firm’s innovative performance as measured by patent application counts. This last empirical analysis is organized as follows: We start with a short introduction in Sect. 12.1. Next, we provide a brief discussion of theoretical background in Sect. 12.2. In Sect. 12.3 we introduce our conceptual framework and derive our hypotheses. In Sect. 12.4 we introduce the data and methods used. Next, we outline the estimation strategy and report our empirical results in Sect. 12.5. Finally, we discuss our findings and conclude with a number of critical remarks in Sect. 12.6.
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Do We Need New Modelling Approaches in Macroeconomics?

Claudia M. Buch, Oliver Holtemöller
Financial Cycles and the Real Economy: Lessons for CESEE Countries, 2014
Abstract
The economic and financial crisis that emerged in 2008 also initiated an intense discussion on macroeconomic research and the role of economists in society. The debate focuses on three main issues. Firstly, it is argued that economists failed to predict the crisis and to design early warning systems. Secondly, it is claimed that economists use models of the macroeconomy which fail to integrate financial markets and which are inadequate to model large economic crises. Thirdly, the issue has been raised that economists invoke unrealistic assumptions concerning human behaviour by assuming that all agents are self-centred, rationally optimizing individuals. In this paper, we focus on the first two issues. Overall, our thrust is that the above statements are a caricature of modern economic theory and empirics. A rich field of research developed already before the crisis and picked up shortcomings of previous models.
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25 Years after the Fall of the Berlin Wall: The Economic Integration of East Germany

Einzelveröffentlichungen, 2014
Abstract
Citizens of the German Democratic Republic (GDR) regained their civil liberties when the Berlin Wall fell 25 years ago. Since then, they have been able to travel freely and have been free to choose where to live and work. The fall of the Berlin Wall was quickly followed by preparations for German Unification at a speed unparalleled in history: the first free Volkskammer elections on 18 March 1990, the economic, monetary and social union on 1 July 1990, and finally, the unification of Germany when the GDR was included in the jurisdiction of the Basic Law of the Federal Republic of Germany. The integration of the economies of East and West Germany, however, has proven to be a drawn-out process.
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Do Better Pre-migration Skills Accelerate Immigrants' Wage Assimilation?

Boris Hirsch, Elke J. Jahn, Ott Toomet, Daniela Hochfellner
Labour Economics, 2014
Abstract
This paper analyzes wage assimilation of ethnic German immigrants to Germany using unique administrative data that include an administrative estimate of immigrants' expected wage in Germany at the time of migration. We find that a 10% higher wage potential translates into a 1.6% higher wage in Germany when also controlling for educational attainment, thus pointing at partial transferability of pre-migration skills to the host country's labor market. We also document that wage assimilation is significantly accelerated for immigrants with higher wage potentials. Our results are both in line with complementarities between pre-migration skills and host country-specific human capital and a U-shaped pattern of immigrants' job mobility with initial downgrading and subsequent upgrading.
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EFN Report Autumn 2014: Economic Outlook for the Euro Area in 2014 and 2015

, 2014
Abstract
In autumn 2014, world production continues to be expanding at a moderate rate, a bit faster than at the beginning of the year. A strong upswing of the world economy is, however, not in sight: the US upswing continues but is not probable to gain more pace, and the Chinese economy has to cope with severe problems in the financial and the housing sector. Important conditions for a stronger recovery are in place: the fall in financing costs allows euro area governments to conduct fiscal policies that are, on average, clearly less restrictive than in the years before, and nonfinancial firms benefit from a shrinking burden of interest payments. Interest rates for bank credit in the southern economies are now slowly going down. However, the recovery will stay sluggish as long as firms and households lack confidence in the economic policy of important member states. In fact, economic confidence in the euro area declined somewhat during summer in part due to news on the conflict between Russia and the west, although only about 5% of all exports leaving the euro area go to Russia or Ukraine. Production growth in the euro area slowed down to stagnation in the second quarter, mainly due to a decline in Germany related to a weather effect. Demand in the rest of the euro area continued to slowly expand. In this context, we forecast that the euro area economy will expand by 1.3% in 2015, after 0.9% in 2014. For 2014 and 2015, we do not see any significant reduction of the unemployment rate, because employment dynamics will stay weak due to subdued growth and the still rising participation rate in the euro area. Our inflation forecast for 2014 is 0.5%. In 2015 inflation will also remain subdued, at about 1.1%.
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