The German lessons

The German lessons

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 11th of March.

In not so distant past, ten years to be precise, Germany was considered the sick man of Europe. Its budget deficits were above the 3 percent limit prescribed by the EU, unemployment rate was higher than the European average and the economy was mired in recession. A decade later, it has emerged as a role-model for others to follow.

Before getting into the debate whether others should emulate Berlin, it’s important to distinguish between what governments can achieve and what remains the responsibility of private sector, workers and the society at large.

No doubt, the government manages public finances. In 2003, Germany ran a fiscal deficit of about 4 percent of GDP, higher than the EU average at that time. Ten years since, Germany has a balanced budget while most eurozone countries run a deficit higher than Germany’s a decade ago.

The German government turned a corner by reducing expenditure. In 2003, government expenditure was 48.5 percent of GDP. By 2008, it had been cut by five percentage points. When the great recession arrived in 2008, Germany had one of the lowest expenditure ratio in Europe.

Also Germany was widely considered uncompetitive during the first five years of the euro due to its high wage costs. It may sound impossible today, but many feared Berlin’s lack of competitiveness could never be resolved. But a combination of wage restraint and structural reforms ensured Germany became competitive.

However, that analysis is partially correct. The government didn’t impose wage restraint, rather high levels of unemployment forced workers to accept lower salaries and longer working hours while wages continued to rise by 2-3 percent in the peripheral countries. While the government imposed labour market reforms, available data suggest productivity growth over the past 10 years have been among the lowest in Europe.

Productivity gains in the German service sector remain negligible due to lack of any reforms. While productivity in manufacturing increased due to intense international competition, the service sector – despite being twice as large as the industrial sector, continues to lag due to over-regulation and government protection.

Nonetheless, there are important lessons to learn from the Germans. While labour market reforms can bring the marginal groups in the jobs market, expenditure cut can help in long-term fiscal consolidation. Though some of today’s peripheral nations are being forced to undertake drastic reforms by their creditors, the measures are likely to promote productivity gains and flexibility in the long run. These economies will emerge leaner and more competitive in future.


GBP/EURO – 1.1476
GBP/US$ – 1.4936
GBP/CHF – 1.4198
GBP/CAN$ – 1.5336
GBP/AUS$ – 1.4592
GBP/ZAR – 13.5854
GBP/JPY – 143.45
GBP/HKD – 11.5724
GBP/NZD – 1.8182
GBP/SEK – 9.5590

EUR: The shared-currency slumped against the US dollar as latest non-farm payroll figures showed the US economy created more jobs than anticipated and the unemployment fell to its lowest level in four years. The EUR/USD pair started the day above 1.3100, but sank to a low of 1.2965 before finishing the day at 1.2999. Moods were weighed down further after Fitch Ratings agency cut Italy’s credit standing to BBB-plus from A-minus, citing last month’s inconclusive general elections. German industrial output for January also fell short of expectations, being unchanged versus expectations of a 0.6 percent increase. GBP/EUR meanwhile have traded nearly flat since Friday and opens at 1.1480 this morning.

USD: The US dollar made solid headway against major currencies Friday after non-farm payrolls for Feb. came in much stronger than expected at 236,000 versus forecasts for 162,000. Unemployment rate also fell to 7.7 percent, the lowest level since 2008. The GBP/USD cross fell from 1.5030 to 1.4930, but regained some ground later to end the week at 1.4886. The greenback rallied to a three-year high against the Japanese yen on hopes the US economy will weather government spending cuts or “sequester” and payroll tax hikes. The ICE-dollar index, a measure of the US unit’s strength against a basket of six global currencies, rose to 82.750 from 82.090 on Thursday. The cable has however recovered through the Asian session and opens at 1.4935 this morning. There’s not much economic news due for release today and hence the prospects of a stronger pound is slim.

Have a great day!


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