“The budgets of the state governments and their local governments shaped up very well in the second year of the coronavirus pandemic,” the Bundesbank writes in its Monthly Report. According to the publication, they recorded an overall surplus of €5 billion in 2021. Despite the favourable state of their finances, state governments made use of emergency borrowing totalling €18 billion under their respective debt brakes. Based on the Bundesbank’s calculations, a large part of these funds was used to top up reserves. It appears that budgetary developments will be favourable this year, too. The Bundesbank sees no need for further emergency borrowing. The positive financial situation will allow state governments to play a part in tackling the energy crisis.

The worsening energy crisis, a sharp economic slump and abruptly rising market interest rates could put the financial system in Germany under considerable pressure. “To ensure that potential stress is not amplified via the financial system, financial institutions must be sufficiently resilient on their own,” said Claudia Buch, Vice-President of the Deutsche Bundesbank, at the presentation of the 2022 Financial Stability Review. “Financial institutions should assess the impact of adverse scenarios. Given the high uncertainty, they should engage in prudent risk provisioning and exercise caution when distributing profits,” emphasised Bundesbank Executive Board member Joachim Wuermeling.

Croatia is introducing euro cash on 1 January 2023, making it the 20th Member State of the euro area. Croatian kuna banknotes can be exchanged for euro free of charge at all Bundesbank branches between 1 January and 28 February 2023. Croatia’s accession to the euro area will change the composition of the Governing Council of the European Central Bank (ECB) and the ECB’s capital, as well as the capital key used to calculate it.

Bundesbank President Joachim Nagel anticipates continued high levels of inflation next year and does not see them declining markedly until 2024. “We expect the average annual inflation rate in Germany to be around 7% in 2023,” Mr Nagel explained in an interview with the “Stern” magazine, adding that it would then be significantly lower in 2024. “Nevertheless, the road immediately ahead remains rocky. That is why we are resolutely maintaining our monetary policy stance.”

How is Germany’s international price competitiveness faring in light of high energy costs? The Bundesbank’s experts explore this question in the latest edition of the Monthly Report. To this end, they examined the impact of the higher energy costs, on the one hand, and the euro's depreciation against the US dollar, on the other. Their result was that, at least from a macroeconomic perspective, the depreciation of the currency is probably still offsetting high energy prices.

Despite the energy crisis, the Deutsche Bundesbank does not expect the German economy to experience a severe downturn in the winter. “While economic output is likely to contract initially, we expect that the economy will gradually recover from the second half of 2023 onwards,” said Bundesbank President Joachim Nagel upon the release of his staff’s latest projections. However, the report states that inflation is high and only likely to decline gradually. “According to our projection, the rate of inflation in Germany is likely to fall to 2.8% by 2025,” Mr Nagel explained.

In a joint interview, Bundesbank President Joachim Nagel and François Villeroy de Galhau, Governor of the Banque de France, discussed “Germany, France and inflation – ways out of the crisis”. Their discussion centred on the question of when the current monetary policy stance will bear fruit and the medium-term inflation target of 2% will be achieved again. “I am firmly convinced that we will see significantly lower inflation rates from 2024 onwards. We will reach 2% with the monetary policy measures we have initiated this year,” Mr Nagel said.

Bundesbank branches can pay out cash at any time, even in contingency and crisis situations – according to Executive Board member Johannes Beermann, comprehensive risk preparedness measures have put the Bundesbank in a good position to deal with such cases, too. At a meeting with the press in Frankfurt, he noted that successful crisis preparedness was predicated on interplay between all cash handlers, however.

Bundesbank President Joachim Nagel, speaking at an event for Frankfurt economic journalists, has doubled down on his calls to set about downsizing the Eurosystem’s large stocks of bonds in the near future. “I can imagine no longer replacing maturing APP assets as from the beginning of next year,” he said. Mr Nagel is also expecting a further key interest rate hike to be decided at the ECB Governing Council’s December monetary policy meeting.

Contrary to expectations, German economic activity expanded in the third quarter of 2022, the Bundesbank writes in its current Monthly Report. Despite high inflation and uncertainty about future energy supply, real gross domestic product surpassed its pre-pandemic level for the first time. However, the Bundesbank’s experts believe that downward forces are likely to clearly predominate in the coming months. They still expect the German economy to enter a recession in the final quarter of 2022 and the first quarter of 2023, though the scale of the recession is extremely uncertain. “Double-digit inflation could even persist into the new year,” the report states.