Clemens Fuest Text

Der wichtigste Grund für diese Initiative ist die Sorge, dass Arbeitnehmer mit mittlerer und niedriger Qualifikation zunehmend von der allgemeinen Wohlstandsentwicklung abgekoppelt werden könnten. Dass diese Gefahr besteht, ist nicht von der Hand zu weisen. Viele empirische Studien kommen zu dem Ergebnis, dass die Einkommensschere zwischen hoch und niedrig qualifizierter Arbeit sich immer mehr öffnet. Allerdings stellt sich die Frage, ob der vorgeschlagene Fonds das richtige Instrument ist, um diesem Trend entgegenzuwirken.

Der Fonds schafft zunächst lediglich Anreize haben, Ersparnisse in den neuen Fonds zu verlagern, statt sie anders anzulegen. Es mag auch dazu kommen, dass einzelne Haushalte mehr sparen als bisher. Aber vermehrte Ersparnisse ändern noch nichts Wesentliches an der langfristigen Einkommenssituation der sparenden Haushalte, sie verlagern in erster Linie Konsum in die Zukunft. Die entstehenden Kapitaleinkünfte sind überschaubar. Zwar kommen die geplanten staatlichen Zuschüsse dazu, die könnten Menschen mit niedrigen Einkommen aber auch durch direkte Transfers zu Gute kommen.

Darüber hinaus stellt sich die Frage, in welchem Verhältnis der Deutschlandfonds zur privaten Altersvorsorge steht. Wenn die geförderte Ersparnis ebenfalls langfristig sein muss, sind die Wirkungen jener der Förderung privater Altersvorsorge ähnlich. Es droht eine Dopplung der bürokratischen Vorgänge bei der Administration der Förderung. Wenn die geförderten Ersparnisse hingegen schon nach kurzer Zeit für Konsum verwendet werden dürfen, erhält der Deutschlandfonds eher den Charakter einer Ansparhilfe für die Anschaffung von Autos, Fernsehern und anderen Konsumgütern. Auch das ist wohl kaum beabsichtigt.

Für den Deutschlandfonds wird auch angeführt, dass er die Identifikation der Arbeitnehmer mit ihrer Firma stärke. Gleichzeitig wird erkannt, dass es unter dem Aspekt der Risikostreuung problematisch sein kann, wenn Arbeitnehmer in dem Unternehmen ihr Geld anlegen, in dem sie auch beschäftigt sind. Gerät das Unternehmen in eine Krise, verlieren sie nicht nur ihren Arbeitsplatz, sondern auch noch ihre Ersparnisse.

Der Deutschlandfonds will dieses Problem wie folgt lösen. Erstens sollen die Arbeitnehmer durch den Fonds an allen Unternehmen beteiligt sein, nicht nur an dem Unternehmen, in dem sie arbeiten. So wird zwar für Risikostreuung gesorgt. Die Identifikationswirkung der Mitarbeiterbeteiligung geht allerdings verloren. Um diese Wirkung wieder herzustellen, soll der Fonds nur den Unternehmen Kapital zur Verfügung stellen, deren Mitarbeiter Fondsanteile erworben haben. Das ist aus zwei Gründen fragwürdig. Erstens wird die Identifikationswirkung der Mitarbeiterbeteiligung begrenzt sein, wenn die Beteiligungserträge vom Erfolg des eigenen Unternehmens weitgehend unabhängig sind. Zweitens steht die Bindung der Beteiligungsentscheidung an die Fondsanteile der Mitarbeiter im Widerspruch zu einem anderen wichtigen Gestaltungsprinzip, das für den Fonds gelten soll:
Der Regel, dass der Fonds professionell geführt wird und sein Geld in den Unternehmen anlegt, die den höchsten Ertrag versprechen.

Man kann es drehen und wenden, wie man will. Der Spielraum für eine positive Rolle eines Deutschlandfonds ist angesichts der bereits vorhandenen Instrumente zur Sparförderung begrenzt. Das Fondskonzept selbst ist widersprüchlich. Es erscheint vielversprechender, der drohenden Erosion der Einkommensperspektiven in den mittleren und niedrigen Einkommensschichten durch die Förderung von Erziehung, Bildung und Ausbildung entgegenzuwirken.

Spain faces a macro risk – not just a construction sector risk

The current woes in the US housing market have also drawn attention to the situation in Spain. The reason for this is not hard to see: There are striking similarities between the two countries with respect to the development in both house prices and construction activity over recent years.

The current problems in the US market for Residential Mortgage Backed Securities (RMBS) have also been mirrored – if to a lesser extent – in the market for Spanish Cédulas where spreads have widened since the start of this year. Furthermore stock prices – measured on a total return basis – also seem to be discounting some kind of underperformance of the Spanish economy to come: While Germany’s DAX30 has risen by 20 % since the start of 2007 and EuroStoxx50 by 11 %, Spain’s IBEX35 has gained a relatively meagre 6 %. The consensus of economic forecasters puts the economic outlook for Spain at a rate of real GDP growth at 3.8 % for 2007 and 3.0 % for 2008. That would be some deceleration but not a lot below the average rate of expansion by 3.4 % per annum for the 2001 to 2006 period.

As will be argued in this article, the case can well be made for a (much) more pronounced slowdown in Spain’s economic activity. Our current forecast at Union Investment for real GDP growth in 2008 stands at a mere 2.2 %, i.e. clearly below consensus. This is not because we are pessimistic for growth either on a global scale or EMU in particular. In fact, we are quite upbeat for the European growth prospects with a forecast of 2.5 % for 2008 relative to 2.3 % in the consensus forecast. Where we beg to differ, is that we see a strong case to be made that Spain’s economy is not just characterised by a sector risk in construction, but that the corporate sector is in insufficient shape to withstand an adjustment in that sector. That is quite in contrast to the US experience where healthy corporate balance sheets have provided a sufficient buffer to avoid a full-blown crisis stemming from the housing sector adjustment.

Let us now first take a look at the Spanish housing market which has shown a very remarkable boom: in 2006, 658,644 housing units were completed and construction of 760,169 housing units was started. To get this into proper comparison: in the 1990s the respective figures were 267.000 and 292.000 per year. So residential construction activity has more than doubled since then. Another comparison would be to compare the number of housing starts to the population, which stands at 40.4 million in Spain. So in 2006 housing starts where sufficient to provide 2 % of the population with new housing. If we take the corresponding figure for the US at the height of the recent construction boom (2.3 million housing starts) relative to a population of 300 million this would have been sufficient to provide 0.8 % of all Americans with new housing facilities. All told, the Spanish construction boom has been extraordinary both in comparison to past experience and relative to the US.

Residential construction accounted for 9.3 % of Spanish GDP in 2006. That is almost twice the average of G7 countries. Also, it is not only residential but also non-residential construction that has boomed. So almost 18 % of GDP are now construction related. As are over 50 % of total loans on the books of Spanish banks.

These figures, of course, only illustrate that there could be some problems down the road, if the boom of recent years were to reverse. But what can give the confidence that this is likely to happen at all or even in the near-term future?

The recent experience in the US suggests that there are three potential triggers for an adjustment in the housing market – all relative to the average rate of mortgage interest. Rental yields, i.e. the level of rents relative to the purchasing price of a home, individual wages and house prices themselves. The first two of which are already flashing negative signals and the last one coming into dangerous territory right now. Let us examine the triggers in turn:

If the rental yield is higher than the average rate of mortgage interest, the purchase of a home is economically sensible because owning is cheaper than renting over the longer term. Until the end of 2003 the Spanish market has seen a difference between the rental yield and mortgage rates of roughly two percentage points. From end-03 to end-05 the rental yield has been slowly but steadily eroded as the growth in rents did not keep up with the rise in home prices. Since early-06 the successive rate hikes by the ECB have driven up the mortgage rate from a low of 2.8 % to 4.4 %. Since November 2006 the rental yield is below the mortgage rate. Put simply: Renting is now economically more attractive than buying.

As for the second trigger, if the mortgage rate is below the rate of growth of individual income the ratio of personal debt relative to income is going to decline even if there were no amortisation of the underlying debt. Although nominal growth in aggregate wage income has been running at almost 7 % over recent years, most of this increase was driven by rising employment rather than individual wages. Since 2006 mortgage rates are once again above the growth rate of individual wages. Meaning that the servicing of mortgage debt will now mean more restraint if the ratio of debt to income is to be kept stable.

Last but not least, a rate of home price inflation above the prevailing mortgage rate means that the worth of the home is rising faster than the debt burden even if there is no debt servicing at all, i.e. if even interest costs are serviced by taking out new mortgage loans. This condition is still being met with home price inflation running at 5.8 % year-over-year and the average mortgage rate at 4.4 %. The difference is eroded fast, however, due to continued ECB rate hikes on the one hand and home price inflation cooling due to the other two indicators pointing in a negative direction on the other.

One question that is always raised in this context is, of course the impact foreign purchases play in that story. Indeed, there is a fairly high correlation between external buyers in the Spanish housing market and price appreciation. However, one has first to put the magnitude into context. At the very peak of external purchasing activity in early 2003, these transactions amounted to 0.9 % of Spanish GDP and have halved since then. Apart from that, foreigners will be driven by the same rationale as domestic buyers, i.e. affordability and economic pay-off. The chances that foreigners will come to the rescue in an environment in which is does not pay to own a home should not be regarded as high.

Next, there is the question of why Spain’s ability to cope with a retrenchment in the housing market should be more limited than the one in the US. The answer to this is an entirely different situation in the corporate sector. Part of all our economic analysis at Union Investment is a stringent examination of flow-of-funds statistics especially with regard to the health of the nonfinancial corporate sector. The basic rationale here is that all income flows that have a direct nexus to production originate from this sector (the Ricardian assumption of the wage fund). Then we take a look at how much money flows back to the corporate sector via sales. The difference between the two measures is known as the savings or financing gap. The financing gap can be formally defined as retained earning plus depreciation minus investment spending. In normal times it is slightly negative as investments do not have to pay off in the period of their acquisition. If the savings gap of the corporate sector deteriorates, growth is normally accelerating. This is in line with Schumpeter’s famous statement that the entrepreneur uses (credit financed) funds to make an advance contribution to economic growth. Economic booms are therefore associated with deteriorating financing gaps and rising leverage, while slumps are characterised by broad-based retrenchment and decreasing leverage in the nonfinancial corporate sector.

It is here where one can find the striking difference between the US and the Spanish macro developments during the housing boom: In 2000, the US financing gap of nonfinancial corporations stood at -3.5 % of GDP and gross debt at 97 % of GDP. Since then, the financing gap has narrowed to -0.2 % and gross debt was reduced to 79.4 % of GDP. The US corporate sector thus has no fundamental problem to withstand the shock of the housing slump and replace construction as a driver of economic activity. It is even quite surprising that the corporate sector on the far side of the Atlantic is still in such a good shape this far into the economic upswing. By contrast, the Spanish corporate sector exhibited a financing gap of -5.1 % of GDP in 2001 which has until 2006 deteriorated further to -8.1 %. Gross debt has risen from 66 % of GDP to 106 % of GDP over the same period.

The Spanish corporate sector seems, from our perspective, extremely close to a retrenchment itself – even if there were no problems in the housing market. If fact, there are only two other countries we evaluate on a regular basis that have ever come close seeing corporate financing gaps of the magnitude prevailing currently in Spain. One is Japan in 1990, the other is Portugal in 2000. The experience of corporate retrenchment in both cases in the following years has been anything close to pleasant.
With regard to Spain, there is now one open question and one piece of hope. The open question relates to the adjustment within a currency union. Central to a successful retrenchment in the corporate sector is the ability to increase sales and/or reduce costs, i.e. some other sector has to step in to fill the void. This could either be households, the state or the rest of the world. With Spanish private household finances also being stretched, only the government and the rest of the world can do the trick. The open question and the piece of hope both relate to the external sector. The good news for Spain is that the start of the adjustment might come at a time when the world economy is generally in good shape.

Japan had to do its bit at a time when world trade suffered from three consecutive shocks – the US recession of 1991, the breakdown of the European Monetary System of 1993 and the Asian crisis of 1997/98. Portugal had to start its adjustment in 2001 amid the turmoil of the bursting tech-bubble of 2001. While Japan is now out of the woods, Portugal continues to ail. Mostly because it has been unable to improve its price competitiveness vis-à-vis its European trading partners. This can be tracked to the continuation of high pay increases relative to productivity and other European countries.

It will remain to be seen whether Spain can pull off this trick faster than its western neighbour. But it seems a fair bet to envisage a significant slowdown relative to the recent past in Spain even if the general environment remains benign.

David Milleker is chief economist of Union Investment and a regular guest contributor to Eurozone Watch.

How to limit pro-cyclical fiscal policy in EMU

We have just published an article in the German weekly DIE ZEIT calling for a reform of European budgetary rules in order to limit the national governments’ pro-cyclical fiscal policies.

We start from the observation that fiscal policy once again is turning pro-cyclical in a number of European countries. Germany is cutting corporate taxes and increasing discretionary spending at a moment when the economy is growing with rates close to 3 percent (see our post here). France’s new president Nicolas Sarkozy is cutting income taxes for home buyers and overtime payment in a boom, providing an ill-timed boost to the economy (see post here) and the Italian government has just increased their deficit target from 2.3 to 2.5 percent of GDP inspite of strong tax revenues (the money supposedly will go into more social spending).

We thus pretty much see a repetition of the mistakes made in the New-Economy-Boom 1999/2000 when governments increased spending and cut taxes so much that in the following downturn they were forced to then cut spending or increase social security contributions pro-cyclically.

As we have argued before, this pro-cyclical policy is harmful, not only in a downturn, but also in an upswing. First, fueling the boom increases the risk that the ECB overshoots with its interest rate hikes while trying to limit inflationary pressure. Second, according to recent economic research, stronger amplitudes in the business cycle might dampen long-run growth as it lowers the steady-state spending of companies on research & developments. The current fiscal policy in EMU is thus a real obstacle towards reaching the targets of the Lisbon agenda.

In the ZEIT article we therefore propose to use EU fiscal policy to limit the national excesses of fiscal policy. We therefore propose three major elements of reform:

1. Money from the EU budget should be disbursed in a more counter-cyclical manner. Over the past years, money from the structural funds have for example fuelled the Spanish construction boom at a moment when the sector was already bloated. A possibility would be to slow building projects in a boom and expedite them in an upswing.
2. The EU budget should be financed by a cyclically sensitive tax. We propose a European tax on corporate profits. With a tax rate half today’s average in the EU, the whole European budget could be financed. In addition, each country could levy an additional tax, pretty much as it is the case in the US today. This tax would also introduce a minimum level to limit harmful tax competition.
3. A European unemployment insurance should be introduced. This insurance would drain purchasing power from booming regions and thus limits the overheating of a boom, while it would funnel money into regions in dire straits. This insurance could be organised as a basic insurance which could be topped up by additional national benefits.

These proposals would not only put some stabilization into the EU budget. It would also limit the leeway for harmful pro-cyclical national fiscal policies. By putting one of the most cyclical tax at the European level, the national governments will have less possibility to misinterpret cyclical revenue increases as structural. By pulling the unemployment insurance partly on the European level, there will be less possibility to cut contributions in an upswing or benefits in a downturn (as it has happened for example in Germany over the past years and is set to happen again in 2008).

Now would be the moment to move forward with sensible proposals like that especially as Sarkozy has already put the governance of the euro-area on the table. It would be a good idea for Germany to become an advocate of these reform proposals to provide a counter-weight for Sarkozy’s proposals which might well move euro-zone governance in a harmful direction if left uncontested.

German Fiscal Policy: Pro-cyclical again

This week, the German government has been debating its budget for 2008. While everyone in the grand coalition seems to be content that finance minister Peer Steinbrück has managed to increase spending, cut taxes and cut the deficit at the same time, there are signs that the government is repeating the mistakes of the red-green government: As I argue in today’s Financial Times Deutschland (full German text here), fiscal policy is turning pro-cyclical once again.

The impressive improvement of the German budget situation (the Kiel institute sees a balanced budget for the government as a whole – including social security, states and municipalities – already in 2007) is more a result of strong tax increases than of very recent spending restraint. Especially corporate taxes have risen strongly. From 2005 to 2006, revenue from the “Körperschaftsteuer”, the federal tax on corporations, has risen by almost 60 percent.

Spending, on the other hand, has been low thanks to falling transfers to the unemployed. Beyond these monetary transfers, Steinbrück’s predecessor Hans Eichel has kept a lid on spending, but Steinbrück has relaxed the stance again. Government spending ex transfers has been growing on average by 0.5 percent from 2002 to 2005, but has picked up since. The Kiel institute now sees an increase by 2.3 percent this year and 3.4 percent next year.

Add to this a cut in unemployment contributions planned for the beginning of 2008 and the corporate tax reform which will cost € 6.5 bn in the first year after enactment according to the federal ministry of finance (and up to € 10 bn according to critics) and you again have a clearly pro-cyclical fiscal policy. This can also be seen by the fact that the Kiel institute now sees a growing headline deficit for 2008 (0.1 percent of GDP instead of a balanced budget in 2007) – and this in the wake of a strongly expanding economy.

The danger is that the money is again missing for a sensible stabilization policy once the boom ends. Germany might then again go for pro-cyclical budget consolidation – the same mistake which has helped keep the country in quasi-stagnation from 2002 to 2005.

Eurozone Watch has long argued that the governance structure of EMU is prone to pro-cyclicality in fiscal policy. Given that recent economic research hints that pro-cyclicality might actually hurting the long-term growth prospects, this is more than a mere nuisance.