FxNews—Germany’s economy has been slow for a while. It has not performed as well as other countries in the Eurozone since mid-2021.
Germany’s economy relies heavily on making things and selling them to other countries, more than the average Eurozone country. But since the end of 2021, people have been buying less stuff and spending more on services instead. This is good for countries like Italy and Spain, which have many tourists.
Global Trade Drops Hurting Germany’s Export-Driven Economy
World trade is also slow. It was high in 2021 and 2022, but it’s gone down again. This might be because people stocked up on things in 2021 and 2022 to avoid problems with supply chains. But this isn’t good for Germany’s economy because they sell much of their stuff to other countries (about half of their GDP).
We think world trade and manufacturing will improve in 2024, which should help Germany’s economy. However, in the long term, Germany should try to get people to spend more money at home, which could help stabilize the economy. One way to do this could be to lower taxes for people who don’t earn much money.
EU Budget Plans
EU countries must tell the European Commission their budgets for the next few years. Italy and France probably won’t try to reduce their deficits much. Spain is still figuring out its government, so we don’t know their budget yet.
Germany will have a smaller deficit in 2024 than in 2023, which is good because it’s below the limit set by the Maastricht criteria (3% of GDP). These criteria are suspended until spring 2024 but might be returned after that.
Impact of Delayed Budget Plans on Market Spreads
In the short term, some countries delaying their budget plans could cause some worry in the market, and spreads (yield premiums) could increase. Energy prices have gone down a lot, so governments should be spending less on subsidies and decreasing their deficits.
However, higher interest rates will make budgets tighter in the coming years, so they should plan for this. Italy’s budget will probably be watched closely because it has a lot of debt (more than 140% of GDP).
Italian spreads in the 10-year range have gone up to more than 200 basis points, which is as high as they were at the start of the year. Bond yields went up a lot in September, and spreads of many Eurozone sovereign bonds against Germany increased, but not by much.
ECB’s Intervention in Sovereign Bonds Sell-off
The ECB can intervene if a country’s sovereign bonds are being sold off frequently. This can limit the impact, but it can’t stop spreads from widening. The ECB can reinvest money from the PEPP program, which was set up to buy bonds when the pandemic started.
The next step would be the Transmission Protection Instrument (TPI). The ECB’s Governing Council decides when to use this instrument to buy a country’s bonds. However, it is only used if financing conditions worsen in a way that is unsustainable.
So, spreads have to go up significantly before the TPI is used, and certain criteria have to be met for it to be used. The last option is Outright Monetary Transactions (OMT), which are only used if a country gets money from the Eurozone rescue fund (ESM) and agrees to implement a restructuring program. This is only for extreme cases.
