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With the extension of its controversial bond purchase program, the European Central Bank (ECB) has cemented its zero interest rate policy for years. Because the players in the capital markets are hungry for ever larger injections of money. Returning to normal monetary policy is becoming increasingly problematic.
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ECB President Mario Draghi risks missing the right time to move away from low interest rates, warn critics. “With the long-term commitment to a loose monetary policy, an exit is becoming more and more difficult,” says Isabel Schnabel. If the economy recovered more strongly in the near future and required a tightening of monetary policy, the monetary authorities should face a serious problem. According to the expert, they would then have to raise interest rates faster than the markets could cope with: “That could trigger a new financial crisis.”
Cold withdrawal threatens
The sum of 1.5 trillion euros that Draghi had promised by March 2017 caused huge disappointment on the stock market on Thursday. “The reaction shows how dependent the financial markets have become on ever more liquidity and ever lower interest rates,” said chief economist Thorsten Polleit of Degussa Goldhandel. Cold withdrawal threatens the markets.
At the moment, the ECB is still making sure that the financial markets are kept happy with its cash injections. Ideally, the economy in the currency area should also benefit from this and the gross domestic product should grow faster.
Cash injections only stimulate growth to a limited extent
The chief economist of Deutsche Bank, David Folkerts-Landau, is critical of the fact that the central bank has maneuvered itself into this position as a growth accelerator: “It is disappointing that the euro zone is still not in the seven years after the start of the financial crisis It is able to stand on its own two feet and that central banks have to intervene with guarantees and extreme monetary policy measures. “
Despite all the help, growth is still slow compared to the economic engine that is already running at full speed in the USA, where far more jobs are being created: the ECB is forecasting an increase in gross domestic product of 1.5 percent in the euro zone for 2015. In 2017 it should be 1.9 percent.
But with the current expansion of bond purchases, tightening monetary policy has become a long way off. Then almost ten years will have passed since the outbreak of the global financial crisis. Nevertheless, the state of emergency on the interest rate front will probably continue to prevail in Europe, while the US Federal Reserve is expected to initiate a return to normality as early as mid-December.
The dark side of the flood of money
This asynchronous monetary policy on both sides of the Atlantic is likely to lead to upheavals in the financial markets sooner or later, skeptics warn: “More risk is the dark side of the elixir of liquidity,” says economist Thomas Böckelmann from asset manager EuroSwitch. Even if the ECB primarily wants to use its measures to fuel inflation which it believes is far too low, the bond purchase program is also intended to stimulate lending and encourage companies to invest more.
According to the expert, the zero interest rate policy also has its dark sides here: “It is already evident today that companies prefer to borrow cheap money to buy back their own shares instead of developing new projects.”
Bond purchases take the pressure off the boiler
In addition, with the purchase of bonds from highly indebted euro countries, the ECB ensures that the capital market has in some cases become a self-service shop for these countries: “Currently, two trillion euros in government bonds already have negative interest rates: That is, finance ministers even get money for them borrowing, “explained Böckelmann.what is the main idea of to kill a mockingbird De facto, this means that there is less pressure on countries like France, Italy and Belgium to get their debt problems under control quickly.
This concern also drives Bundesbank boss Jens Weidmann, who is in the minority in the ECB Council as a critic of the lax line: He warns of the “risks and side effects” of crisis medicine if cheap money circulates in the financial system for too long leads to exaggerations.
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The head of the Berlin research institute DIW, Marcel Fratzscher, recently explained the package insert for the supposed panacea of the ECB as follows: “Monetary policy has negative side effects – for example the risk of bubbles forming on the stock markets.”
The “economic wise men” have corrected their figures for German economic growth. You are forecasting a steep upward trend for the German economy. Instead of the previous 1.6 percent, the economy is expected to grow by 2.2 percent in the coming year.
As several media reported unanimously, the experts now expect growth of 2.0 percent for 2017. In the spring they had predicted 1.4 percent. For the next year, the forecast will be raised from 1.6 percent to 2.2 percent. In view of this development, economists are warning that the economy will overheat. The German economy is in overutilization, quoted the “Handelsblatt” in advance from the report.
On Wednesday morning, the Council of Economic Experts wants to hand over its annual report to Chancellor Angela Merkel (CDU) to assess macroeconomic development – better known as the five “economic modes”. The economists should take the opportunity to give the Union, FDP and the Greens advice in the middle of the Jamaica explorations on how economic and financial policy should look in the next four years.
Abolish solos and lower wage taxes
According to the “Handelsblatt”, the Advisory Council advocates tax and duty relief, among other things. With a reform of the income tax, the citizens should be given back additional income from the cold progression. This must be coordinated with a “gradual abolition of the solidarity surcharge, so that the financial policy leeway is not exceeded”. In addition, the unemployment insurance contribution rate should be reduced from three percent today to 2.5 percent.
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The future federal government is forecast to have financial leeway for tax cuts and other spending of around 30 billion euros. The politicians know exactly this on Thursday – then the results of this year’s tax estimate will be announced.
Hans-Werner Sinn is the head of the Ifo Institute (Photo: imago) Hans-Werner Sinn from the Ifo Institute has forecast the worst crisis for the German economy since the end of the Second World War. Economic output will shrink by at least two percent. And the economic expert has not given the all-clear for 2010 either. In contrast, according to his colleague Klaus Zimmermann from the German Institute for Economic Research (DIW), things could look up again as early as mid-2009.
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Unemployment rises dramatically
Sinn also expects a dramatic development on the labor market: “Unemployment will rise by half a million by December,” said the Ifo President of the “Bild” newspaper. In 2010, four million people could be unemployed. The only bright spot is inflation: Because of the slump in the oil price, Sinn said the inflation rate in 2009 fell to an average of 0.9 percent.
Disagreement about Germany’s future
Klaus Zimmermann from DIW, on the other hand, does not paint the future quite so bleakly. The economic expert is also forecasting a minus for this year. “But it won’t be as dramatic as many fear. We assume that things will go down just as steeply as they will from mid-2009 and that the economy will grow again,” he told the Tagesspiegel. The decline in gross domestic product in the new year is expected to be less than three percent. In 2010 the improvement will then consolidate. However, by then there could be “a few hundred thousand more unemployed”.
DIW President against new economic stimulus package
And so, in contrast to other economic experts, Zimmermann opposes a comprehensive economic stimulus package from the federal government. “Anyone who throws billions around now risks that the money for infrastructure, education and research will become even scarcer in the long term and that the national debt will displace private investments.” “Confidence-building measures that are effective in the long term” are better. But these are also problematic: there is no budgetary scope for permanent tax cuts, and the fact that there is a lack of building-ready projects speaks against investment programs.
Downswing has a cleansing effect
Zimmermann even takes positive aspects from the crisis. The recession is accelerating overdue reforms and causing entire industries to position themselves better. “A downturn is in a certain way cleansing, only healthy companies survive.”
At least 70 billion euros in new debt
According to Zimmermann, the state will face at least 70 billion euros in new debts in 2009 and 2010. “That doesn’t even include the burdens from the bank bailout – that could easily double the amount.”
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Renewable energies will remain on the rise in 2018 and at the same time will be less responsible for the rising electricity prices in Germany. This is what the Berlin think tank Agora Energiewende estimates in its latest study.
The costs for household customers are likely to increase slightly by an average of 1.4 percent to around 30 cents per kilowatt hour (kWh) in the new year, as Agora boss Patrick Graichen told the German press agency on Thursday. But this is mainly due to the higher prices in electricity wholesale, which in turn are driven by more expensive raw materials such as natural gas, coal or oil. In contrast, wind and solar power are becoming increasingly cheaper because of the reduced state subsidies and the tendering rules for new systems.
Last year, according to preliminary data, the eco-carriers wind, solar, water and bioenergy achieved a share of 36.1 percent of total electricity consumption – a record, as the experts from Agora Energiewende determined. The growth in 2017 was also large in relation to the amount of electricity generated: The share of renewables is now 33.1 percent – significantly more than nuclear and hard coal power plants produced together (26 percent). The Federal Association of Energy and Water Management (BDEW) announced similar figures for power generation shortly before Christmas.
Green electricity cheaper than conventional energies
“We have arrived at a renewable electricity system,” says the Agora director. More competition after the reform of the Renewable Energy Sources Act (EEG) contributed to the fact that the feed-in tariffs for offshore wind power fell to less than 2 cents in 2017 and for solar power to less than 5 cents per kWh.
The expansion of green electricity is financed, among other things, by the EEG surcharge, which is borne by all consumers. With new systems, the electricity is meanwhile “consistently cheaper” than in the fossil variant, explains Agora. However, gas-fired power plants remained important in the transition. And the full effect of lower green electricity cost shares will only show when planned projects are implemented. The “apex” of the price increase was reached around the year 2021. “Then the harvest years of the energy transition will come,” says Graichen.
Despite renewable energies, CO2 emissions are stagnating
However, there are problems with the carbon footprint: “In 2017, CO2 emissions stagnated for the third year in a row instead of falling.” Despite the climate-damaging brown coal, electricity generation came off relatively well overall. But greenhouse gas emissions have risen recently, especially in freight transport, in industry and in the energy balance of many buildings that can be improved.
“We are now stepping on the spot when it comes to climate protection,” warns Graichen. The goal of reducing Germany’s emissions by 40 percent by 2020 compared to 1990 is in danger. That is also why the phase-out of lignite must move forward. Part of an “immediate program for climate protection” should also be the promotion of new boilers that are not fueled with oil.
Green electricity can secure energy supply in the long term
The gap between production and consumption results in particular from the international trade in electricity. On particularly windy days, such as New Year’s, excess quantities are exported – also in order to relieve the insufficiently developed network during such peaks. Graichen emphasized that customers across the border sometimes even get money (“negative prices”) for electricity they buy. In itself, eco-energies could secure the German supply in the opposite case – sudden “dark doldrums” with little wind and solar power – even if more and more old lignite power plants leave the grid alongside nuclear power.
The export of electricity last year reached the mark of around 10 percent of domestic consumption. Exports rose by 10.4 percent and imports by 15.9 percent – with a total of almost three times as much exported as imported, and the trend is rising. The eye of the needle for efficient supply in Germany remains the network expansion with more “electricity highways” and better distribution networks. The transmission system operator Tennet had to spend almost a billion euros on interventions in 2017 due to insufficient line capacities.
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A joint interest group for the renewable energies industry Schleswig-Holstein has been founded: The new regional association for renewable energies Schleswig-Holstein (LEE SH) wants to drive the energy transition in the north, the association announced on Thursday in Kiel.