Summary of the October Monthly Report
The German economy in the international division of labour: a look at value-added flows
With increasing globalisation, the German economy has continued to open up over the past 20 years. German enterprises seized the opportunities that arose, for example, from the integration of central and east European countries into European production links and from growth shifting towards emerging markets. They did this by staking out their position on the fast-growing markets early on and achieved cost advantages by making greater use of international value-added chains. This was associated with a higher level of specialisation and a substantial rise in exports and imports, especially of intermediate goods.
Thanks to new data, it is now possible to provide a detailed representation of foreign trade in value-added terms. Together with the comparison with flows of goods, this provides additional information of the structure of foreign trade and its role in the international division of labour. The revenue and expenditure generated in foreign trade of goods and services are increasingly exceeding the volume of cross-border flows of value added. For example, Germany's value-added exports amounted to an average of 70% of export revenues in 2010 and 2011; in the second half of the 1990s, this figure had stood at almost 80%. The higher share of foreign value added suggests that the success of German exports is increasingly attributable to suppliers of input and intermediate goods from other European countries. In addition, bilateral trade links in particular are becoming more influenced by production and demand-driven third-country effects. As a result, the importance of individual countries or groups of countries for the German economy's foreign business is also shifting. The largest exporter in terms of value added are the United States, followed by France – the frontrunner in foreign trade.
From a sectoral perspective, it is mainly the manufacturing sector that is very closely involved in international production networks and is therefore a particularly active participant in intermediate goods trade. At around one-fifth, services make up a relatively small share of German exports. By contrast, value added based on services, which is also transferred via the goods account, now amounts to nearly one-half of Germany's export revenues. Thus, competition and cost structures in the services sectors are of major importance for the German economy's international competitiveness.
Launch of the banking union: the Single Supervisory Mechanism in Europe
Europe's Single Supervisory Mechanism (SSM) for banks will be launched on 4 November 2014. Whereas banking regulation, ie the development of binding rules governing credit institutions' behaviour, has been intensively harmonised for quite a long time already, especially at EU level, the SSM is the first significant step towards increased communitisation of supervisory practice in Europe. In future, the European Central Bank (ECB) will perform a pivotal function in supervising banks located in the euro area (and non-euro-area EU member states that join the SSM voluntarily) and, in so doing, cooperate closely with national supervisory authorities.
The legal basis for the SSM, which governs responsibilities and the division of tasks between the ECB and the national supervisors, was already adopted in 2013 and is now about to be put into operation following a one-year transitional period. The ECB will be responsible for the direct supervision of 120 significant, major banks or banking groups, in close collaboration with national authorities. Joint supervisory teams (JSTs), comprising staff from the national competent authorities (NCAs) and the ECB and directed by the ECB, will play a major role in supervising significant banks. By contrast, medium-sized and smaller banks will remain, as before, under the direct supervision of NCAs; however, the ECB can also impose certain framework conditions for these institutions or, in some cases, even intervene in supervision directly. The SSM is akin to a network in which national authorities and the ECB cooperate under the leadership of the ECB.
The SSM is part of the overall banking union project, the next step of which – envisaged from 2016 onwards – will be a Single Resolution Mechanism (SRM) for credit institutions in Europe. Healthy and stable banks are a key precondition to a successful launch of banking union. To ensure this, all currently existing legacy burdens and weaknesses at banks will have to be identified in a timely manner and rectified before the transfer of supervisory responsibility to the European level. Since these "legacy burdens" were accumulated under the watch of the currently responsible NCAs, the respective nations are also responsible for rectifying them, in keeping with the principle of aligning liability and control.
To this end, the euro area's largest banks have been subjected to a "comprehensive assessment" (CA) over the past few months. This CA included not only a review of a selection of banks' balance-sheet and off-balance-sheet items (asset quality review, or AQR) but also stress tests which simulated potential crises and the attendant effects on institutions. The results will be published on 26 October 2014, a little over a week before the ECB assumes supervisory responsibilities.
Methodological changes in the financial accounts – motivation, approach and selected results
As a result of the introduction of the European System of Accounts 2010 (ESA 2010) in September 2014, the methodological basis of many macroeconomic statistics in the European Union was updated and standardised. The Deutsche Bundesbank's financial accounts, which form part of the national accounts, are directly affected by these new provisions. An expansion of the reported data and conceptual changes are the main differences. For example, the data on the claims and liabilities of a given sector have been enriched by adding comprehensive information regarding the sectors vis-à-vis which a given sector has claims and liabilities (who-to-whom relationships). Furthermore, households, which had previously been shown together with non-profit institutions serving households, will be recorded separately for the first time. In addition, the way in which the financial sector is reported will change significantly, with it being broken down into nine sub-sectors. At instrument level, the changes are reflected inter alia in the reporting of claims on insurance corporations and pension entitlements as well as in cash holdings being recorded separately.
The expansion in the reporting of financial flows addresses recent developments in the goods and capital markets, which have seen inter alia the entry of new players and more complex activities. For instance, the latest results pursuant to ESA 2010 show that the sectors are interconnected through numerous financial linkages, although the scale and intensity of the linkages between the sectors vary significantly in some cases. The methodological changes thus help to create a better understanding of activities in the financial sector of the economy and provide valuable data inter alia for monetary policy purposes – with regard to monetary transmission or identifying possible financing bottlenecks, for example – as well as for financial stability analyses.