Politics

Labour costs are rising in Germany – good for consumption, but bad for competitiveness

The statutory minimum wage, that has been in force for one and a half years, is to be raised for the first time in early 2017. The so-called minimum wage commission proposes an increase from currently EUR 8.50 to EUR 8.84 per hour. This corresponds to a four percent rise compared with the gain in average wages and salaries in Germany since December 2014 of 3.2 percent. The commission has thus proposed a slightly disproporationate increase but has not heeded some of the demands made in recent weeks to „take a bigger slice of the cake“ and raise the minimum wage to a round figure of EUR 10. And rightly so, because a disproportionately high increase would have significantly heightened the pressure at the lower end of the wage scale once again. Given the still insufficient time for reliable empirical analyses since the introduction of the minimum wage, we still…

France: planned labour market reform goes in the right direction but is not enough

No bin collections, train cancellations and long queues at petrol stations – for weeks France has been suffering the consequences of the strike organised by the trade unions in protest against the planned labour market reform. The French government wants to use measures including the relaxation of employees’ protection against dismissal and more flexible working hours to bring momentum into the labour market and increase employment. The current reform is not the first attempt to stimulate the country’s labour market. Statistics indicate that there is an urgent need for action. The rate of unemployment in France has persistently been close to the 10% mark for many years. Worst affected are young people, starting their careers. Youth unemployment in the country is almost 24%. In 2015, only around 13% of new contracts of employment were permanent. All others were fixed-term contracts of employment and many with a term of less than…

BVerfG gives the green light for OMT

The German Federal Constitutional Court (BVerfG) rejected the complaint brought before it against the ECB’s OMT programme, declaring the suit filed to be in part “inadmissible” and in part “unfounded”. Moreover, in the opinion of the court, the “rights and duties of the German Bundestag including its fundamental responsibility for budget policy have not been impaired.” The Karlsruhe court thus followed the European Court of Justice (ECJ), which ordained in its ruling of 15 June 2015 that the ECB’s OMT programme was compatible with European law under the conditions and constraints stated at the time. Although the BVerfG again expressed substantive reservations as regards the OMT, these were not so severe as to require the court to deviate from the principle that European law must take precedence over national law. Today’s judgement by the BVerfG is unlikely to have surprised many market players. Following the ECJ’s judgement last year the…

Negative key interest rates: A monetary game of dice

In the aftermath of the financial crisis, an ever increasing number of experiments were carried out to make monetary policy more expansionary. Negative key interest rates are the latest beacon of hope. More and more central banks are introducing negative interest rates to promote lending and thereby inject life into the economy and nudge up inflation. But now a serious economic debate has flared up between central bank representatives and international economic thinktanks over whether these goals can actually be achieved. Over the long term, negative key interest rates involve many risks of producing the exact opposite of what central bankers hope to achieve. 1.) Private households are hoarding cash Negative interest rates are not being passed on to private households anywhere in the world at present. Yet, the longer the era of negative interest rates persists, the greater the pressure to do precisely this. The danger exists of cash…

Eurozone likely to face problems after end of ECB purchase programme

The interim conclusion on the PSPP around 14 months after the start of the programme is mixed. Contrary to what had been feared, the ECB has so far always managed to meet its purchase target in full. In spite of its technical success, however, the ECB has not yet met all the aims inherent to the programme. Although lending in the eurozone has risen sharply, inflation is still close to or even below 0%. Medium-term inflation expectations, which are mainly influenced by the trend in the crude oil price, are in fact below the level at the beginning of the PSPP. This was one of the main reasons behind the ECB’s decision to increase the programme volume substantially in March of this year. In contrast, the market-related consequences of PSPP are considerable. Both yields and spreads have fallen sharply in the meantime, while the volatility of bonds has increased. Moreover,…

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