Summary of the January Monthly Report
Investment in the euro area
The economic recovery in the euro area has also seen investment regain momentum. Aggregate fixed capital formation is still languishing well short of its level prior to the crisis, however, though that was admittedly a period marked by above-average investment growth in some countries. Construction investment, in particular, had reached a magnitude in those countries that was not sustainable. Fixed capital formation has also been trailing behind its longer-term average when measured in terms of the aggregate investment ratio in recent years. Gross fixed capital formation accounted for a mean 22% of GDP between 1995 and 2007, shrinking to less than 20% by 2014.
This decline was driven in part by a deterioration in financing conditions, a high degree of uncertainty and the need to deleverage. All in all, the macroeconomic environment was characterised by major adjustment processes, though some of these inhibitive factors have since lost significance. As a case in point, financing conditions are no longer as restrictive as they were in previous years, and macroeconomic uncertainty is relatively low at the current juncture. Positive impetus is also being provided by the Eurosystem's accommodative monetary policy and by the key macroeconomic adjustments that have already been made.
While these factors can all be expected to shore up investment, the combined impact of macroeconomic activity over the past few years falling well short of earlier expectations and a bleaker growth outlook than just a few years ago is continuing to place a strain on investment. Viewed from this perspective, it cannot be said that fixed capital formation as such has been too low in the period since the financial and economic crisis. Indeed, the aggregate capital ratio has eclipsed its pre-crisis level in recent years, despite the drop in the investment ratio, which would support this notion. The key to boosting fixed capital formation, then, is to focus not so much on investment itself, but more on ways of sustainably improving the euro area's long-term growth prospects.
Rather than measures to stimulate the economy, what is mainly required here is a policy approach centred around strengthening long-term expansionary forces. A failure to do so would leave the investment growth rate mired at a subdued level over the medium term, immune to a brightening economy.
The impact of alternative indicators of price competitiveness on real exports of goods
Traditionally, a country's price competitiveness plays a key role in its export performance. This raises the question – not least in terms of an appropriate assessment of the economic situation and cyclical growth – as to which indicators are particularly accurate in modelling price competitiveness. There does exist a broad consensus that real exchange rates are a comparatively good reflection of the relative price or cost position of a given economy and are therefore suited as indicators of price competitiveness. What is mainly under discussion, however, is which price or cost index should be used to calculate it so that the indicator has a sufficiently close relationship to real exports. All of the conventional indicators of price competitiveness have their own specific advantages and drawbacks.
However, from a conceptual perspective, there is some evidence to suggest that indicators based on broadly defined price and cost indices may be capable of modelling price competitiveness more accurately than more narrowly defined indices, since the latter capture price and cost developments only in some subsectors of the domestic economy. For example, indicators based on unit labour costs in manufacturing, which were once in widespread use, cover only one part of relative cost developments. This is not necessarily representative of overall cost developments in the German economy and can therefore easily lead to distortions and misinterpretations. Price and cost indices that focus on macroeconomic variables avoid this disadvantage.
This article presents a current cross-country empirical study on the suitability of alternative indicators of price competitiveness as determinants of real exports of goods. It was found that a change in price competitiveness generally exerts a statistically and economically significant long-term influence on exports. However, it also came to light that there is often no long-term relationship between indicators based on consumer price indices and real exports. Furthermore, the forecast quality of producer and consumer price-based indicators of long-term export performance proved to be relatively weak. By contrast, more favourable results according to various criteria were obtained for indicators based on deflators of total sales, on GDP deflators or on unit labour costs in the economy as a whole. This supports the above conjecture that indicators based on broadly defined aggregates for modelling price competitiveness are preferable for explaining real exports of goods.
The supervision of less significant institutions in the Single Supervisory Mechanism
On 4 November 2014, the European Single Supervisory Mechanism (SSM), one of the central pillars of a banking union, was launched. It is intended to provide a key contribution to the safety and soundness of credit institutions and to the stability of the financial system in the European Union as well as each individual member state. Unlike significant institutions, which generally have more than €30 billion in total assets and are supervised directly by the ECB, less significant institutions (LSIs) continue to be under the direct supervision of national authorities.
In Germany, this affects around 1,660 institutions which are jointly supervised by the Federal Financial Supervisory Authority (BaFin) and the Bundesbank. These two institutions will maintain their current responsibilities and tasks. In particular, the Bundesbank supervises institutions on an ongoing basis, and will therefore remain these institutions' local point of contact in the future. The European Central Bank (ECB) supervises the LSIs indirectly, performing more of an oversight function. The aim is to ensure uniform high standards of supervision and a consistent approach within the SSM.
These joint supervisory standards are currently being gradually developed by the ECB in cooperation with national supervisors. In addition, the ECB can prescribe focal points of supervision or principles on how to evaluate certain issues. In exceptional cases, the ECB can assume direct supervision if this is necessary to ensure the coherent application of high supervisory standards. As part of its oversight function, the ECB can issue regulations, guidelines or general instructions to be implemented by national supervisors as well as direct recommendations to supervisors. Moreover, national authorities are obliged to disclose certain information to the ECB. The ECB can, in addition, request additional information from national authorities.
The intensity of indirect supervision by the ECB is dictated by an institution's priority, calculated based on its risk profile and its impact on the domestic financial system. Taking stock of indirect supervision now that the SSM has been in existence for slightly over a year yields a generally positive picture. Quite a bit has already been achieved on the road to harmonised European supervision thanks to the close cooperation and intensive dialogue between the ECB and national supervisors. However, many challenges still remain. This year, a particular focus will be on further optimising the exchange of information and the coordination processes between the ECB and national supervisors. BaFin and the Bundesbank will work together to ensure that adequate attention is paid to the proportionality principle and the clear division of responsibilities between the ECB and national supervisors with respect to the supervision of LSIs.