Would the Bundesbank of Germany raise interest-rates if it could?

At the heart of the Euro area economy is Germany but as we have discussed before it has something of an irregular heartbeat in the way it affects its Euro area partners. For example as I pointed out on the 9th of January it is a deflationary influence on them via its balance of payments surplus.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

One does not wish to be critical of it for its relative economic success but there are clear side-effects as well as benefits from it. One is the trade position above another is that fact that its membership of the Euro makes its exchange-rate higher.. For all the talk and indeed promises of economic convergence the fact is that many Euro area countries have economies with little in common with Germany. For example later this year Italy seems likely to move into economic growth territory for its membership of the Euro which is very different to the German situation. Let us investigate the German economy.


On Wednesday this was released by the Federal Statistics Office.

The inflation rate in Germany as measured by the consumer price index is expected to be 2.2% in February 2017. Such a high rate of inflation was last measured in August 2012. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 0.6% on January 2017.

The Euro area standard measure was also 2.2% although it rose by 0.7% on the month. We have a complete switch on the disinflationary period just passed which showed low and at times falling inflation for goods prices as they rose by 3.2%. These were led by energy at 7.2% and food at 4.4%.

This was reinforced only yesterday by this.

the index of import prices increased by 6.0% in January 2017 compared with the corresponding month of the preceding year. This was the highest increase of a yearly rate of change since May 2011 (+6.3%). In December and in November 2016 the annual rates of change were +3.5% and +0.3%, respectively. From December 2016 to January 2017 the index rose by 0.9%.

As you can see there are inflationary pressures in the system and it looks as though imported raw materials will impact the system especially the price of oil which was approximately half the rise. If German economic policy was set by the Bundesbank then there is no way it would have a negative interest-rate in the face of such pressure.


This has traditionally been a weaker link in the German economy and that seems to be continuing as the numbers below have an extra day in them compared to last year.

According to provisional data turnover in retail trade in January 2017 was in real terms 2.3% and in nominal terms 4.5% larger than that in January 2016.

We do get a like for like update on a monthly basis.

Calendar and seasonally adjusted (Census X-12-ARIMA), sales in January 2017 were 0.8% lower than in December 2016 and 0.2% lower in nominal terms.

If we look back to 2010 and mark it at 100 we see that January 2017 was at 106.1 which shows the German economy is not powered by retail sales.

Economic output

This has been a better phase for Germany as this official data shows.

The economic situation in Germany in 2016 thus was characterised by solid and steady growth (+0.7% in the first quarter, +0.5% in the second quarter and +0.1% in the third quarter). For the whole year of 2016, this was an increase of 1.9% (calendar-adjusted: +1.8%).

I am not sure that 0.7%,0.5%, 0.1% and then 0.4% is steady but it was solid! To be fair it was more consistent in annual terms although if we look further at the year it had a feature you might not expect.

government final consumption expenditure was up by as much as 3.2%.

Also Germany did shift a little in terms of one of the world economic issues which is the balance of payments surplus.

exports of goods and services rose by 3.3% compared with the previous year. There was however a larger increase in imports (+4.5%) in the same period. Consequently, the balance of exports and imports had a downward effect, in arithmetical terms, of –0.2 percentage points on GDP growth compared with the previous year.

There was also another sign of a German economic strength ticked away there.

the economic performance in the fourth quarter of 2016 was achieved by 43.7 million persons in employment, which was an increase of 267,000, or 0.6%, on a year earlier.

This performance allowed the headline writers some click bait. From the Guardian.

Germany overtook the UK as the fastest growing among the G7 states during 2016. Europe’s largest economy expanded at the fastest rate in five years, showing growth of 1.9% last year.

Of course the numbers are not precise to 0.1% after all if they were then this adjustment from 2014 as matters such as military expenditure and Research and Development saw new rules would not be necessary.

The conceptual changes have led to an increase in the level of the German GDP, amounting to roughly 3%

Public Finances

These were very strong in spite of the rise in spending.

A strong economic backdrop has helped Germany post a record budget surplus of €23.7bn in 2017 ( they mean 2016), fuelled by higher tax revenues, rising employment and low debt costs. It was the highest budget surplus since reunification in 1990 and the third successive year the government has had a budget surplus.

The old argument is of course that it would help the European and world economy if Germany loosened the public purse strings. This would also presumably reduce the balance of payments surplus in a beneficial double-whammy. The catch in terms of Euro area rules is that the national debt to GDP ratio is at 69.4% above the (supposed) 60% limit although of course rather good compared to the vast majority of its peers.

Looking ahead

The immediate future certainly looks bright for German manufacturing.

The PMI rose from 56.4 in January to 56.8 in February, the highest since May 2011. The increase in the headline figure reflected the output, new orders and suppliers’ delivery times components, while employment and stocks of purchases also made positive overall contributions. The current 27-month sequence of improving manufacturing conditions is the longest observed in over eight-and-a-half years. (Markit)

This led to an improvement also in forecasts for the year as a whole.

The survey results suggest that manufacturing will contribute to a strengthening in overall economic growth in the first quarter. IHS Markit currently expects q/q growth of at least 0.6% in Q1, up from 0.4% in Q4 last year, and is forecasting a 1.9% rise in GDP over 2017 as a whole.”

This has been reinforced by the service sector survey which has just been released.

the rate of expansion in total business activity accelerated and was slightly stronger than the trend shown over 2016 as a whole. Moreover, new business rose at the fastest rate since February 2016 and employment growth was the strongest since June 2011.


Let me leave you all with a question. The US Federal Reserve is hinting ever more strongly at an interest-rate rise this month although of course we await th words of Janet Yellen later. But in 2016 the German economy grew more quickly than the US one and may well do so this year. It also has inflation above target. Where would German interest-rates be if the Bundesbank was back in charge?

If you want a real mind game then imagine where a new German Mark would be and the implications from that?!






42 thoughts on “Would the Bundesbank of Germany raise interest-rates if it could?

  1. Hi Shaun
    In your scenario Germany would become a
    gigantic new Berlin Whale that would filter
    us mere krill by the megaton.


    • Hi JRH

      It may well indeed. The first step is to think that they would raise interest-rates but of course the new DeutscheMark would be very high already and would likely soar. So as you hint at the Bundesbank hedge fund would no doubt follow the new central banking plan of buying equities, would we see Dow 25,000?

  2. “A strong economic backdrop has helped Germany post a record budget surplus of €23.7bn in 2017 ( they mean 2016), fuelled by higher tax revenues, rising employment and low debt costs.”

    Are you listening HMG and BoE ?

    thought not ….

    it aint all about stock markets and houses .


    • Hi Forbin

      There are clearly strengths to the German economy and it opens the debate of how much of its economic strength detracts from others due to its trade surplus. An awkward one in that it gets the position through strength and hard work but of course it was an early currency manipulator.

  3. Germany is doing very well, thank you, being in the EU and Euro, it just a pity about the rest!
    Closer integration among the member states, would leave Germany and its people, a lot poorer, so don’t expect that to happen any time soon. Business as usual.

  4. So housing costs, food and fuel (90% of the budget of the poor) are all rising, well in excess of double the official rate of inflation, whilst zero-hours contracts continue to mushroom.
    Is it any wonder we despise our establishment?
    It will end violently, and TPTB have no-one to blame but themselves.

  5. I think the question you pose is a bit false; if the Bundesbank were in charge this implies no EZ. In this case the German economy would not be in the position it is in now; the structural undervaluation of a synthetic DM has placed the economy in a much better position than it would have been – a position that I am sure you are aware is illegal under the ESM in some respects. The oil price changes would have an effect and I suspect German inflation would be on the up, as it is in many other places, so this is not just a German issue, in which case they might well be considering interest rate rises.

    If you are asking what would the Bundesbank do if it were in charge of the EZ instead of the ECB my answer would be: the same – nothing. They have no alternative; if they start pushing up IRs they will make the same mistake Draghi did in (2012?) when he increased them and the EZ economies tanked.

    The German’s may rail about this situation till the cows come home but they joined a fundamentally flawed currency union and, as they say in polite circles, “suck it up!”

    • Hi Bob J

      Not quite as false as you may think. The knee-jerk response is to think that the Bundesbank would raise interest-rates but the new Deutschemark would rise and tighten monetary policy. So it would face the Swiss conundrum and find itself both easing and intervening on the foreign exchanges and maybe even joining the central banking hedge fund fraternity. Quite an irony don’t you think?

      • OT

        An interesting bit of weekend reading for you:


        You can read the introduction and the conclusions on P23 if you’re lazy (as I am).

        Interesting as it doesn’t at all acquit the CBs of blame for this but it does provide some interesting insights.

        What it does do, quite reasonably, is to take the existing financial institution structure as given but in my view that is a major issue; the cure for this has to include institutional restructuring.

        • “What it does do, quite reasonably, is to take the existing financial institution structure as given but in my view that is a major issue; the cure for this has to include institutional restructuring.”

          They considered some aspects of restructuring but came out against it due to potential regulatory arbitrage:-

          “In contrast, macroprudential tools can be targeted at specific market segments
          or institutions, which can be useful in many circumstances. But they are always subject to
          regulatory arbitrage.”

          page 24.
          earlier on they have also outlined the idea of regulation in accordance with New Keynsian models and have pointed up that the Bank of International Settlements is opposed to this. Therefore, they have dismissed it as something that can’t happen so why bother examining it any further when all you are left with is a theory that will never be implemented?

          It’s called facing the reality that you possess ltd research time which would be wasted if you devote it to theories that can never become reality.

        • “In contrast, macroprudential tools can be targeted at specific market segments or institutions, which can be useful in many circumstances. But they are always subject to regulatory arbitrage.”

          Being useful in many circumstances can’t be interpreted as coming out against it; it only implies that there are no all encompassing solutions.

          “earlier on they have also outlined the idea of regulation in accordance with New Keynesian models and have pointed up that the Bank of International Settlements is opposed to this. Therefore, they have dismissed it as something that can’t happen so why bother examining it any further when all you are left with is a theory that will never be implemented?”

          The BIS haven’t dismissed the use of regulation, but have said that monetary policy should “lean against the wind” and not be inactive at a time of stable inflation but in the presence of bubbles .

          As to something that can never happen well, never is a long time.

        • “Being useful in many circumstances can’t be interpreted as coming out against it; it only implies that there are no all encompassing solutions.”

          which is another way of saying they came out against it, or put another way – They didn’t take it any further or suggest further research in this area….

          “The BIS haven’t dismissed the use of regulation, but have said that monetary policy should “lean against the wind” and not be inactive at a time of stable inflation but in the presence of bubbles .”

          Apologies for poor wording, by “they” I meant the researchers, not BIS.

          Never is a long time, but, being a semi Keynesian I agree with his adage that in the long run you’re dead, therefore I concentrate on what’s likely to happen over no more than a 70 year period, otherwise you’re left with discussing things you or I will never experience leaving no practical reason for raising it in the first place.

        • Because people investing in the currency ( foreigners) get a higher return because of the higher internal interest rates.

          Internally raising rates causes less spending and less growth which means less imports which also supports the exchange rate by acting on the balance of trade. On the other hand exports may be choked off by the higher exchange rate and this will act in a contrary way.

          What the balance of these forces is is dependent on circumstances.

  6. Great blog as always, Shaun.
    I really envy the Germans their 1.9% growth rate. Our numbers were announced yesterday for 2016Q4 real GDP by expenditure and December 2016 real GDP by industry. The Bank of Canada had forecast 1.3% growth even in its January Monetary Policy Report, so the spin was we were supposed to be elated that the actual annual estimate was 1.4% growth, due to a strong fourth quarter (2.6% annualized). Apparently it didn’t matter that we did worse than Germany, the UK, the euro area or the US for annual growth. At least the Canadian economy finally seems to be out of its recovery phase from the 2015H1 contraction. Real GDP per member of the active population finally exceeded its 2014Q4 peak in 2016Q4 and its December 2014 peak in December 2016. The length of the recovery was due to its weak, stop-start pattern, but we finally seem to be into an expansion.

    • Hi Andrew and thanks

      Your comment reminded me to take a look. So the growth was all in the latter half of the year.

      “Real gross domestic product (GDP) rose 0.6% in the fourth quarter, following a 0.9% increase in the third quarter. ”

      I was curious about the impact of the resources industry but there only seemed to be some detail about its export performance.

      “The growth was led by the exports of crude oil and crude bitumen (+7.9%) and metal and non-metallic mineral products (+4.0%).”

  7. For comparison, how have real wages changed during this period ? My impression is that German wage levels have tended to follow the slow-but-steady approach.

  8. Shaun,

    German courts have ruled that 10+ year home loan accounts can be closed by banks as they were intended for property purchase not long-term high interest savings! I suspect local banks are struggling in thie current low interest environment and would welcome interest rate increases.

  9. Hi Shaun,

    Excellent summary of Germany’s current comfortable economic position.

    If Trump’s Border Adjustment Tax is implemented as currently specified, then this will add about 20% to the cost of goods imported into the US. With German exports of $121bn and imports of $61.6bn (source OEC) this leaves plenty of scope for a large decrease in exports to the US. Germany maybe forced to do much more US manufacturing, encouraged by the proposed incentive of a 1st year 100% writedown allowance if you build a factory there,

    Can / will the Euro continue, where the ‘losing’ countries electorate are increasing looking at ‘populist’ solutions. depending on the French election result we may see a Euro exit or even a full Frexit. The can is still being kicked down the road for the €1tn Italian banking crisis and rising ‘populist’ parties there..Where will this leave Germany in terms of the Euro currency value and how will this European instability affect them?

    So, although Germany are currently enjoying an economic ‘clear sky’, there are certainly some ‘storm clouds’ on the horizon.

    • I’m sceptical about gains from Trump’s border tax, Monsanto for 1 is a big loser from the TPPA withdrawal. There are plenty of agricultural countries who will sell corn to Mexico, the losers being US midwest farmers. And then there’s the Trump slump in hotel and flight bookings. Tourism is a big employer in Florida. Everybody loses from trade wars.

      And then there is potential for the EU to create a ‘minimum business tax’ on US tech companies European earnings …

    • If a Frexit occurs the Euro will weaken further but German Bunds will remain expensive with super low yields due to it’s economy and Germany wins again.

      The only way Germany loses is if the peripheral countries of Greece, Italy and Portugal etc leave as the Euro would then become a shooting star.

  10. I’d raise the question of German FDI into EU countries, and it appears that German FDI is contributing to some countries growth and prosperity. This report doesn’t breakdown FDI by country https://www.brookings.edu/wp-content/uploads/2016/06/German-Investors-Reshaping-Europe.pdf , but common sense dictates that German businesses will invest where they feel welcome and safe, where they get value for money.

    For example, Lufthansa opened an airplane servicing hangar in Sofia. LinkedIn advertises many call centre jobs for German speakers, engineers etc all based in Sofia. German FDI is contributing to economic growth and employment gains. I tried to compare job offers in Athens, but couldn’t find how to search for jobs in Greece – the location doesn’t seem to exist according to linkedin ….

    I’d suggest a harder DMark would result in more low value manufacturing being nearshored out of Germany. These jobs probably won’t go to highly regulated, highly taxed, strike happy France or Greece where the oligarchs have made a point of demonising Germans.

    • Hi ExpatInBG

      The idea of such a use of the trade surpluses is intriguing to say the least. Another type of economic power? When Japan struggled with a high Yen it invested abroad in countries like Thailand in a similar fashion. Do you think Bulgaria will be a winner or a loser out of this?

      • The circumstantial evidence shows Bulgaria to be winning big time. This evidence is in websites like jobs.bg – Bulgaria only has about 8 million, Sofia about 1 million people. Skilled pay for white collar workers in the private sector is good, but teachers and medical staff are badly paid.

        I know Romania also has a buoyant IT sector and outsourcing companies like Softserve, Epam & Luxsoft heavily recruit Bulgaria, Romania and the Visegrad companies – even offering skilled work visas to Ukrainians etc. Circumstantially I see all these countries benefitting from German FDI.

  11. Hi Shaun thanks again for a thought provoking article unfortunately I think we are heading for stagflation and if by some miracle they decided to increase interest rates money would flow to them and away from us unless we followed suit.If we did raise interest rates we would be in real trouble due to our £1.7 T national debt.
    My cynical side thinks .Would any Central Bank raise interest rates? No of course not they are enjoying the financial repression and debt slavery putting the working class back where they were before the war,zero hours contracts and pensionless,indebted cradle to grave.
    Never mind Nigel Boris Michael and Theresa are taking us to the land of milk and honey where the pound will drop like a stone and make our minuscule exports cheaper.

    • Hi PrivateFraser

      Well we wait at the moment to see if the US Federal Reserve will back up its increasing rhetoric about another interest-rate rise. After Janet Yellen spoke this evening more than a few seem to have placed their bets.

      “After #Yellen speech, market sees nearly 100% chance of #Fed rate hike in March.”

      • I think it will raise as it’s probably almost as scared by Trump’s stagflationary pronouncements as I am!! Think about it:

        1. Taxes to be reduced

        2. Fiscal to be massively increased and spent on infrastructure

        So that’s collapsing revenues allied to massive expenditure increases all financed by???Oh yeah, US treasuries leading to…… Doh!!!

  12. Hi Shaun
    ‘One does not wish to be critical of it’, this ‘one’ does!
    Germany has/is following a mercantile policy designed to prosper at the expense of its own working class and its neighbours in general. It expanded the reunification policies to cover the whole EZ. It doesn’t just export goods , it exports its problems financially and now its uncontrollable electricity output to the cost of Poland and Czech in particular.
    There is nothing magical about its performance over the last 15 years or so. If Trump ever followed through on his taxation/trade promises on Germany it would be felt quite severely.

      • Germany has swallowed the CAGW meme completely. It over invested in wind and solar generation and closed its nukes and coal. It now has an electricity grid that it cannot control within its national boundaries. It is either in feast or famine state. When the wind blows you get electricity that has to go somewhere, unlike fossil fuel plant you can’t turn it up or down. When it doesn’t blow and/or the sun doesn’t shine you need imports fast. The only way Germany has managed this is to dump the uncontrollable electricity over it borders and in particular given the network connections it lands up in Poland and Czech. What makes it a lot worse is that the dumped flows produce frequency problems on the whole of the neighbouring grids such that they actually need to start up their own expensive reserve generation in order to hold their grid frequencies otherwise the whole thing would go down.
        Its a typical example of Germany being ‘wonderful’ , doing so much to improve its image as this forward looking society; when in fact its driven up prices to its own customers such that their prices are now 2nd highest in Europe and having no thought to the harm and costs imposed on its neighbours.
        Its exactly the same with Merkel’s ever so humanitarian offer to allow MENA migrants to cross everyone else’s borders to get to Germany. Which is now resulting in the EU threatening fines on those countries not wishing to take ‘their share’ now that Merkel is having 2nd thoughts now she is facing reelection.
        And of course its just the same as its use of the Euro since inception.

        • Germany has adopted an unpredictable on/off generation system but they retain an archaic fixed price electricity billing system. If they want to optimize such assets they need to radically reform electricity billing – which is technically possible with an intelligent grid + network of appliances. A properly implemented cost structure would pay market values for stored electicity (buy cheap, sell dear). This is needed to make storage infrastructure development & operation profitable.

          Germany has paid very high prices for early solar panels, which are now dropping in price. They will be stuck with expensive feed-in tariffs and/or losses for many years. There are solar projects happening in the Gulf at very competitive prices – I note the Gulf has much higher sunshine hours than Germany.

          Bangladesh is a poster child for off grid solar, lacking grid coverage throughout much of the country. Much of rural Australia & New Zealand would benefit from offgrid solar because the long distance grid infrastructure is expensive to maintain, and in NZ’s case suffers periodic destruction in earthquakes.

        • Hi Shaun, I heard complaints from a German how the Dutch were buying lots of ‘green electricity’ from Germany well below cost price … my source lives near Bremen and worked in maintenance of nukes

  13. Another way of looking at it is that if Germany still had the DM the rest of Europe would either have not bothered with the euro at all or have a weaker single currency. This would have helped the rest of what is now the eurozone grow which would have been beneficial for German exports and the global economy more generally.

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