The first quarter of 2015 is likely to have seen a further sharp increase in German economic output following its already strong expansion at the end of 2014, according to the Bundesbank’s latest Monthly Report.

The Bundesbank economists believe that a continuation of this buoyant upward cyclical movement is likely for the second quarter as well. "The main drivers in this context are external demand, private consumption and, to a lesser extent, housing construction," they write. They also see signs of something of an upturn in corporate investment. "The consumer climate, which has been sustained for some time now by a positive labour market outlook and large wage increases, has gained considerable momentum of late owing to significant energy-related gains in purchasing power and additional government transfers," the Monthly Report states. The fourth quarter of 2014 had not only seen a perceptible increase in private consumption, however, but also a sharp rise in the household saving ratio. The additional real spending capacity had therefore not been used in full by the end of 2014, the Bundesbank economists conclude.

The underlying upward trend in industrial output remained intact, according to the March Monthly Report, with industrial production in January 2015 a seasonally adjusted 1% higher than the fourth-quarter average. The upturn in the labour market had also become stronger at the beginning of the year, with the number of employed persons in Germany in January climbing by a seasonally adjusted 42,000 on the month.

Consumer prices rose steeply, meanwhile. Chiefly as a result of the recovery in crude oil prices, consumer prices in February as calculated by the Federal Statistics Office (Destatis) showed a seasonally adjusted increase of 0.6% on the month. Along with energy, food products likewise became more expensive, and the prices of services also rose distinctly mainly on account of package holidays, the Bundesbank economists write.

Reliably delivering on the promise of a union of stability

The financial and debt crisis has confronted the European monetary union with major challenges. Another of the articles in the latest Monthly Report briefly takes stock of the situation before detailing a number of specific approaches to strengthening the regulatory framework of the euro area. The authors comment that majority political support for a political or fiscal union or for a substantial change to the EU treaties appears an unlikely prospect at present. "As long as that remains the case, it will be crucial to strengthen the existing regulatory framework of the euro area so that it can reliably deliver on its promise to act as a union of stability in the long term," they argue.

The article outlines ways of making governments and investors more accountable for their actions and thus bolstering the monetary union's resilience to crises. The economists emphasise that the ability to withstand, as far as possible, "the extreme scenario of a member state becoming insolvent" was part and parcel of a union in which the member states retained most of their fiscal and economic policy autonomy, adding that greater financial stability will play a pivotal role in this context. To achieve this, the economists argue, the sovereign-bank nexus needs to be severed as far as possible. For instance, they advocate abolishing the practice of affording banks' sovereign exposures privileged regulatory treatment and generally classifying them as risk-free. The Bundesbank experts stress that, overall, banks' loss absorbency must be strengthened, arguing that, "in extremis, orderly resolutions of even large, interconnected financial institutions must be possible without recourse to government funds".  

The Bundesbank economists stress the need to tackle the current tendency towards ever more opaque and lax application of the fiscal rules. One option cited by the economists is a transfer of responsibility for budgetary surveillance from the European Commission to an independent institution which would have the sole objective of ensuring sound public finances. In addition, the Bundesbank experts believe it necessary to strengthen the incentives for sound public finances created by the financial markets. Finally, they propose enhancing crisis management mechanisms to avoid making it all too easy for governments and investors to shift the burden of responsibility to the countries providing financial assistance. The Bundesbank stresses the importance of ensuring that "the primary focus of monetary policy remains on price stability", as well as the need for monetary policymakers to resist pressure to be held accountable when banks or sovereigns become overindebted.

The complete March edition of the Monthly Report can be downloaded from the Bundesbank's website.